The uncertain economy has made us warier about loosening the purse strings. In 2024, the average UK savings account holds now around £17,365, with around six in 10 (61%) of adults saving money most months. Of these savers, 57% choose to put their money in a savings account, separate from their current account*. It looks as if we’re becoming a nation of savers. So, with so many saving options out there, let’s take you through how fixed rate bonds work and if they could be the right option for your money.
How does a fixed rate bond work?
A fixed rate bond allows you to put a lump sum away for a set amount of time. When you open a fixed rate bond, you’ll also lock in your interest rate, meaning you’ll know precisely how much interest you’ll earn during the fixed term you choose, usually between one and five years.
Unlike some savings accounts, such as easy access, the interest rate on a fixed rate bond stays the same throughout the whole term. This can give savers peace of mind, particularly in times of economic uncertainty as your savings won’t be affected by fluctuating interest rates.
When opening a fixed term bond, you’ll need to deposit a lump sum which you won’t be able to access until the fixed term is over. Once the term is over, this is known as maturity, you can withdraw the funds along with the gained interest or if you’ve a longer-term savings goal, reinvest your money!
The pros and cons of a fixed rate bond
Pros (key benefits)
- You’ll know the return: With a guaranteed interest rate for the term of the bond, you’ll know exactly how much you’ll earn. This makes it easier to plan and offers peace of mind.
- Interest rates can be higher: Fixed rate bonds can provide higher interest rates than other types of savings accounts, such as easy access savings accounts. Always do your research beforehand to make sure you’re getting the most out of your money.
- Protection from rate changes: A great positive of having a set rate of interest is in a low-interest environment, your savings will continue to earn the same amount and not be affected by lower interest rates.
- Low maintenance saving: Fixed rate bonds are straightforward, offering peace of mind and an easy way to save without the need for constant monitoring or decision-making.
- Your money is safe and secure: Fixed rate bonds are virtually risk free. Plus, if you open a fixed rate bond with a UK bank like us, your funds up to £85,000 are protected by the Financial Services Compensation Scheme (FSCS), giving you an extra layer of security. Find more information about FSCS protection here.
Cons (or as we like to say, considerations)
- Your money is locked away for the duration of the bond: Until the bond matures you won’t be able to access your money, or you might incur an early release fee or lose some of the interest accrued. However, because you can choose the duration of a fixed term bonds – usually either 1 year, 2-year, 3-year or 5-year terms – you can choose which term would work best for you.
- You may lose out on higher interest rates available: The economy is fragile at the moment, but we have seen some healthy interest rate rises for savers over the past few years. If there was an inflation rise significantly above your bond’s interest rate, you wouldn’t be able to take advantage of the higher rates offered in other savings accounts until your fixed rate bond matures.
- No Additional Deposits: Most fixed rate bonds don’t allow you to add funds after the initial lump sum deposit, which can be a limitation if you want to continue saving more within the same bond.
Can I have more than one fixed rate bond?
Yes, you can have more than one fixed rate bond, either with the same bank or across different banks. A benefit for savers having more than one fixed rate bond is laddering. This is having fixed rate bond savings in varying terms —such as a 1-year, 2-year and 5-year bond. It allows you to benefit from higher rates on longer-term bonds while still having access to funds as the shorter-term bonds mature and you’ve more flexibility to move your money if interest rates rise.
Do I have to pay tax on fixed rate bonds?
The interest you earn on fixed rate savings bonds is taxable, however, many savers will have some level of tax-free savings protection thanks to their Personal Savings Allowance (PSA). Basic rate taxpayers can earn up to £1,000 in interest annually, tax-free. While higher rate taxpayers can earn up to £500 in interest, tax-free. It’s only additional rate taxpayers who do not qualify for a PSA. It’s only if your interest earned exceeds your PSA you’ll need to pay income tax on the excess. If you think this could be something which may affect your savings, you may want to consider a cash ISA as a better choice to maximise your tax-free earnings.
Choosing a fixed rate bond
With fixed rate bonds with differing interest rates and terms, it’s important you choose the right one to suit your financial needs and goals. Take these four simple steps before you open your savings account:
- How much you have to save: The first thing you need to do is work out how much money you’d like to deposit as your lump sum into a fixed rate bond.
- How long you can lock your money away for: Once you know how much you’d like to deposit, you need to consider how long you’re comfortable with saving this for without access.
- Do your research: have a look around at the best interest rates for the term you’re considering. It’s worthwhile comparing the offering of other banks rather than going with your current account provider.
- The T&Cs! If the unknown happens and you did need to access the funds early, you need to know if there’s a penalty. Taking a little time to read the T&Cs could be a deciding factor when choosing your provider.
Exploring a fixed rate bond for you
If you want a secure and predictable way to grow your money, then a fixed rate bond could be the savings option for you. From access levels or interest rates, we’re here to help you find your perfect savings fit. Find out more about Hodge savings products.
* UK savings statistics for 2024 from the Bank of England
This article is correct at time of publishing and for general information purposes only. We recommend you speak to a professional financial adviser for advice. You can find a financial adviser and further personal finance information at unbiased.co.uk.