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What are savings bonds and how do they work? 

5th March 2024

Are you looking for a smart way to grow your savings? A fixed rate savings bond could be a great match for you. Fixed rate bonds are a straightforward and safe way to lock away your money for a set amount of time. With fixed rate bonds, you get the peace of mind that comes with a set interest rate, so you know right from the start how much interest your money will earn. Explore our guide on how savings bonds work, the options available and if a fixed bond will suit your savings goal.  

What is a fixed rate bond?

If you’ve got some extra cash you’re happy to part with for a set amount of time, a fixed rate bond could be a good move for you. It’s a savings account offering you a fixed interest rate over a set period that will not change, even if interest rates fluctuate. Typical terms offered will be  1, 2 or 3 years, but can be up to 5 years. 

Once the fixed rate bond term ends, also known as reaching maturity, you can access your money having known from day one what interest you’ll have earned, which is great for people who like to plan ahead. 

What happens at the end of the fixed rate term? 

If you open a fixed rate bond savings account with Hodge, we’ll be in touch at the end of your term to ask if you’d like to re-invest, transfer or withdraw your money. And if life is a little busy and we don’t hear from you, we’ll automatically transfer your funds into a maturity holding account until you’re ready to decide your next step. 

Are fixed-rate savings accounts safe and secure? 

As long as you keep your money in the savings account until the bond matures, you’ll get back all your savings plus the interest you’ve earned along the way. If you do need to withdraw early, some lenders will allow this, but often will charge a notable penalty which means you could get back less than you put in. 

Your money will also be protected by the Financial Services Compensation Scheme (FSCS). The FSCS is the UK’s deposit guarantee scheme. Trusted UK banks and building societies like Hodge  are authorised by the Prudential Regulation Authority (PRA) or Financial Conduct Authority (FCA) and are FSCS protected. This means the FSCS protects 100% of the first £85,000 you have saved, per financial institution, not per account. And it isn’t limited to savings, you can also be FSCS protected for mortgages, insurance and investments if an authorised financial services firm goes bankrupt. Find out more about keeping your savings safe 

Do you have to pay tax on fixed rate bonds? 

Yes, the interest you earn from fixed rate bonds is a taxable income. However, depending on your income tax band, most people can earn some interest in their savings without getting taxes involved. For example, a basic rate taxpayer is eligible for a Personal Savings Allowance (PSA) of up to £1,000 for the tax year 2024/2025. This means someone can earn up to £1,000 in interest on their savings without paying any tax on it. You can find out more about tax and savings here. 

If you’re looking for a tax-free alternative, a fixed rate ISA might be your best fit. A fixed rate ISA works the same as a fixed rate bond but with one standout feature: the interest you earn is completely free from income tax. The current ISA allowance is £20,000. This is the amount you can put in one or more ISAs each tax year without paying any income tax on the interest. This limit is set by the HMRC and reviewed each year. 

We’ve based this information on current tax regulations which do change. Before you make any financial decisions we recommend you speak with a professional financial advisor. 

Is a fixed rate savings bond right for you? 

Before opening a fixed rate savings bond it’s important to check if it’s the right choice for you.  

By committing to keep your investment in a fixed term bond, you're rewarded with a fixed interest rate for that period, giving you potentially less fluctuations to interest earned than you can find in a more accessible savings account. It could be a good choice for those looking to give their lump sum a chance to grow over the mid to long term. However, fixed rate bonds are the strong, silent type – not great if you need frequent access to your funds. They're perfect for those who are okay with a commitment, but if you're someone who likes to keep their options open, this might not be the best fit. 

If you think there’s a chance you’ll need to dip into your savings now and then, you might find easy access savings accounts a friendlier option as you'll be able to withdraw your savings when you need them, 

With a Hodge fixed rate bond, you can: 

  • Choose a 1, 2, 3, or 5 year term 
  • Get a guaranteed interest rate when you apply 
  • Open and manage your account online 
  • Opt to have interest paid annually or monthly, into either your savings account or your nominated bank account. 
  • You need to deposit a minimum of £1,000 into your account within 14 days of opening your account. 

How to open an account 

At Hodge, if you’re aged 18 years or older, are a UK resident and have a lump sum of at least £1,000, you can take advantage of our fixed rate savings bonds. It’s free to open a fixed bond account, click here to find out more and apply online

Whether you're after different access levels or interest rates, we're here to help you find your perfect savings fit. Find out more about Hodge savings products.  

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