Fixed Rate Bonds, is it right for you?
“It doesn’t matter which side of the fence you get off on sometimes. What matters most is getting off. You cannot make progress without making decisions.” —Jim Rohn
Fixed bond saving accounts are interest-paying accounts usually targeted at individuals who can keep their money stored away and don’t need regular access to their money. Fixed-rate accounts are ideal for those putting money aside for a particular purpose, such as purchasing a car or holiday. There is a range of terms to choose from to match your saving need so that your funds will be ready by the time you need them. Depending on the fixed-rate account, you might get one-two year terms, though some terms last a few months. And are offered by banks and financial institutes. Like many other accounts, Fixed-rate accounts have advantages and disadvantages to having one.
Below is information on everything you need to know about Fixed term saving accounts.
How does a Fixed-rate bond work?
Fixed-rate bond saving accounts allow savers to put money aside for a certain amount of time for a fixed interest on your money. Although the rates for this type of account are appealing, you will not be able to access your funds until the fixed term bond has come to an end. Banks and financial institutes cannot alter the interest rates during the bond term.
Fixed-rate bonds generally have better interest rates than easy access accounts. The amount your fixed-rate bond generates depends on the bond term and the quantity of money you deposited into the account.
What are the advantages of opening a Fixed-rate bond account?
Interest rate stays the same
The interest rate stays the same throughout your term bond, which means you can calculate the amount of interest you will gain in total.
Better interest rates than Easy Access Accounts
Fixed-rate accounts usually have better interest rates than easy access accounts, though they have less flexibility than easy access accounts, as, with easy access accounts, you can access your account to deposit and withdraw money as often as you require, but the rates are not as high and can be altered by the bank or financial institute at any time.
Higher interest rates for lengthier term bonds
If you opt for a longer-term bond by choosing to leave your money untouched for an extended period, you will typically get higher interest rates.
The Financial Services Scheme (FSCS) covers fixed bond saving accounts. They cover up to £85,000 of your funds if the building society or bank were to go into liquidation. In addition to this, the FSCS will also cover any interest you have earned, as long as the total amount in the account remains under £85,000. It is worth checking if your bond rate provider has the FSCS logo to ensure that your funds are covered.
What are the disadvantages of opening a Fixed-rate bond account?
The disadvantage to having a fixed term bond is that your account must mature before you can access your funds, which may not be ideal if you have an unexpected financial crisis and need to access your account earlier than you had initially anticipated. In addition, if you access your funds early, this could reduce or remove any interest your account has earned. Although the interest rate is fixed for this type of account, you are likely to profit from having this account; however, if interest rates increase in the future, your current interest rate will remain the same, meaning you will not benefit from any rises in interest.
What else should you consider when opening a Fixed-rate account?
Fixed-rate bonds vary in bond duration from six months to five years, although most savers chose a 1-year term bond. You cannot access term bonds during the term bond; therefore, it is essential to consider how long you could stay without accessing your funds.
There are many different saving accounts in the market, so it is crucial to think about your saving needs and how much fixed rates bond accounts match your saving requirement compared to other saving options before taking the plunge and opening a fixed-rate bond account.
What are other alternatives to having a Fixed bond account?
Investing in the stock market
Investing in the stock market is an alternative for savers with more significant amounts of money, though this puts your investment at risk as the stock market can be unstable and unpredictable depending on how the markets perform.
High-Interest account and Regular Saving Account
High interest and regular saving accounts are other options for earning higher interest rates, though these account types typically limit the maximum amount you can have in the account, which tends to be a few thousand pounds.
Is it possible to save into a fixed rate tax-free?
The answer is yes; if you choose a fixed rate ISA, you can save into the account tax-free. Fixed-rate ISAS work the same as other fixed bonds, except for one difference, Fixed-rate ISA is free of income tax fees. In the current tax year 2022/23, the maximum amount that can be saved into a fixed rate ISA account is £20,000.
However, the introduction of Personal Savings allowance (PSA) in April 2016 means that if you opt for a fixed-rate bond that is not a fixed rate ISA and are a basic taxpayer, you will not have to pay tax for the first £1,000 of saving interest. In contrast, high-rate taxpayers are entitled to the first £500 having tax-free savings interest.
Intellisaving is a smart saving platform and application that supports multiple saving accounts, such as fixed-rate bond saving accounts. Intellisaving integrates all your saving and interest-bearing accounts to their platform to facilitate your manageability of these types of accounts, as you will be able to view your accounts in one place. Intellisaving also enables users to compare the products they currently hold with banks/building societies to other available products. This app for saving also has a watchlist to add products that pique your interest during your comparison search on the app. The platform is also home to many other saving features, making it the best app for finance management.
Fixed-rate bond saving accounts can be a worthwhile investment if you can set your money aside for a set period. Furthermore, this account’s suitability for your saving requirements can also depend on your reasons for saving and how often you need to access the account.
If you decide to have a Fixed-saving account, it would be a good idea also to have an Easy access saving account as well in case of an emergency so you can access your easy access saving account when you need to tuck into your funds, whilst your fixed saving account stays untouched for the duration of the bond to reap the rewards of your investment when the time comes to access your fixed-rate bond saving account.
But of course, the decision of what the ideal saving account is for you is ultimately yours; this is simply a guide to inform you of what to consider when deciding if the Fixed rate saving account is the right one for you.