What are Fixed Rate Bonds?
Fixed rate bonds (also known as fixed term bonds) provide an alternative savings method from your average savings account. These bond accounts are offered by most banks and financial institutions and provide a predefined guaranteed return on your savings.
Fixed rate bonds put you in charge of your saving plans, allowing you to choose a realistic term in which your money will remain untouched, based on the rates offered for each period of time. The terms generally last anywhere between six months to five years, with some providers offering no maximum deposit limits.
Do they provide better returns?
Bonds generally provide higher rates of interest than other bank accounts, so fixed rate bond accounts are ideal for people who have spare money that they can afford to lock away for a fixed period of time.
There are a number of factors that you need to be aware of before choosing your account, for example, some accounts offer interest that it added onto your balance monthly, which then accumulates more interest throughout the year based on the total balance. Other accounts pay the interest owed when the term ends, or pay the interest into a separate savings account on a monthly basis, so you will only be paid interest on the opening balance.
Upon opening an account you are usually only able to make one deposit, with no future deposits during the agreed term.
What should I be aware of?
If you're planning to open a fixed rate account you need to be aware that most providers do not allow access to the funds in the specified periods under normal circumstances. However, if you fall into trouble or require your money in the event of an emergency, accounts generally offer access to your money, although this may come with an early withdrawal penalty such as some or all of the interest you accrued being deducted. This is why it's best to look at your options and assess your finances before choosing an account.
The interest rate offered on a fixed rate bond is fixed for the agreed term. Therefore if the Bank of England base rate were to significantly fall within the term, the rate offered would not change, so you can effectively protected yourself from falling rates. However, this can also work against you, as rates could rise during the term, with rivals offering higher rates than your account is earning, 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 very important to be aware of your bank or financial institutions compensation scheme to ensure your money is covered by the Financial Services Compensation Scheme (FSCS) - an independent fund coordinated by the FSA (Financial Services Authority).
This scheme protects your money providing compensation in the event of banks collapsing. This means that any money held with a bank that is registered with the FSCS will provide protection of up to £85,000 (£170,000 on a joint account) per bank or institution.
However, it is important to be aware that many financial mergers have taken place in the past, which means that some banks, while marketed as independent, actually fall under the same financial institution.
For example Bank of Scotland, Halifax and Birmingham Midshires all belong to HBOS. This means that if you were to have multiple accounts across several of the HBOS brands, you would only be protected for up to £85,000 across all accounts.
For this reason it is recommended that you spread your savings around if you wish to invest more that £85,000.
For a frequently updated list of banks by institution, see our Top Ten Savings Tips!