What are Fixed Rate Bonds?
Fixed rate bonds (also known as fixed term bonds) provide an alternative savings method to your average savings account. These accounts are offered by most banks and financial institutions and provide a guaranteed return on your savings.
Bonds generally provide higher rates of interest than other bank accounts, so these accounts are ideal for people who can afford to lock away these funds for a fixed period.
Fixed rate bonds put you in charge of your savings plan. They allow you to choose a term during which you can lock away your funds to achieve better rewards. The terms generally last anywhere between six months to five years. Some banks require a minimum deposit to achieve a certain rate, but there's rarely an upper limit to the amount you can invest.
What should I be aware of?
There are a number of factors that you need to be aware of before choosing your account. For example: some accounts add interest to your balance every month so the interest is compounded throughout the year. Other accounts pay interest annually or at maturity, while some pay the interest into a separate account, so you only receive interest on the opening balance.
You are not usually allowed to add to a fixed-rate bond once it has been opened. Similarly, most providers will not allow access to the funds during the term. In the event of an emergency, lenders will probably grant you access to your money, though this may trigger a hefty interest penalty. This is why it is useful to assess your options carefully before choosing an account.
The interest rate offered on a bond is fixed for the entire term, which protects you from base rate fluctuations. If the Bank of England base rate falls significantly during the term of the bond, the bank cannot lower your rate. However, the same can also work against you. If the base rate rises during the term, savings rates may overtake your bond, but you will be locked in at the agreed rate.
It may be a good idea to look into predictions over base rate changes before deciding on the term of your bond.
Do they offer the same level of protection by the FSCS?
It is important to be aware of how your funds are protected in the event that your bank or building society fails. The vast majority will be covered by the Financial Services Compensation Scheme (FSCS).
Provided the bank is registered with the FSCS, your deposits will be protected for up to £85,000 per person (£170,000 for a joint account) per institution. It's important to be aware that some banks and building societies share a registration, normally as the result of a merger or takeover. In this case, your funds are protected across all of these brands collectively rather than each one individually.
For example, the Bank of Scotland, Halifax, and Birmingham Midshires all fall under the registration of HBOS. This means that if you have accounts or bonds across several of these brands, you are protected for up to £85,000 across all of these accounts together.
So if you have a large volume of savings, it's important to check that your funds are not exposed. One way you can protect your savings if you have more than £85,000 is to spread them across different institutions. But it's also worth checking to see which banks form a single institution so you can avoid exposing them unwittingly.
For a frequently updated list of banks by institution, see the 'independent banks' and 'grouped banks' tables on our main savings page.