What are fixed rate bonds?

Fixed rate bonds are offered by banks and building societies as a type of savings account. Savers lend their money for a fixed period of time in return for an interest rate payment. The interest rate remains the same until the bond matures. 

Bonds are known as fixed income securities because investors know how much income will be received. Many bonds issued by governments or companies pay a fixed rate of interest over their lifespan until they mature. Regular interest payments are paid to investors, known as coupons.

Pros and cons of fixed rate bonds:

Pros 

• Usually pay higher rate of interest compared to other savings accounts – such as easy access.
• The certainty of knowing the interest rate will remain fixed and will not be cut.
• Very low risk.

Cons

• The rate of interest may be lower than inflation. If that’s the case, capital is being eroded in real terms.
• Not suitable for regular savings.
• Your money is locked up, and there will be penalty charges or loss of interest if you need to access to it.

Can I withdraw my capital early from a fixed rate bond?

Some providers do allow early withdrawals. However, the trade-off is a heavy penalty such as a reduced interest rate, or a charge. This is called an ‘early access penalty’ or ‘interest penalty’. Sometimes the penalty can result in savers making a loss as it eats into the amount originally invested when the fixed rate bond was taken out. 

Tax and fixed rate savings bond

The Personal Savings Allowance (PSA), introduced by the government, means you probably aren’t paying tax on the income you take from your savings. The first £1,000 of savings income for a basic-rate taxpayer and £500 for a higher-rate taxpayer benefit from a 0% income tax rate. 

But if you are paying income tax on your savings interest, consider having money in an ISA where it will be tax free.

Are fixed rate bonds a good option?

Fixed rate bonds usually pay higher rates of interest than other savings products such as easy-access accounts because the capital is locked up until the end of the term. 

The interest rate of easy-access accounts is generally lower than savings accounts with less immediate access such as fixed rate bonds. 

Having both an easy-access and a fixed rate bond savings accounts could be a prudent approach. This allows you to have instant access to some savings, while receiving a higher interest rate on other savings.