What is a Fixed Rate Bond and how does it work?
A fixed rate bond is a type of savings account that offers a fixed rate of interest for a set period of time. If you have an amount of money available that you don’t need for living expenses or emergencies, you may want to consider investing a lump sum in a fixed rate bond, also known as a fixed term deposit.
This guide will walk you through what a fixed rate bond is, how it differs from other savings products and relevant information you should consider before putting your money into a fixed rate bond.
Is a fixed rate bond right for me?
Can I have more than one fixed rate bond?
Do I have to pay tax on fixed rate bonds?
Can I open a fixed rate bond as a joint account?
What is a fixed rate bond?
A fixed rate bond (or fixed term deposit) is a type of savings account that you can put money into for a set period of time. It's usually 1, 2 or 3 years, but can also be as long as 5 years.
This means that you lock your money away for the agreed period of time and you won't be able to withdraw during the fixed term. In exchange for agreeing to not withdraw your money during this term, you get a fixed rate of interest that is generally higher than what you would get from a savings account that allows regular withdrawals.
Is a fixed rate bond right for me?
A fixed rate bond may be suitable for those looking to invest a lump sum, or those looking for a mid to long term savings account.
As you agree to lock your money away for a fixed term, it's not suitable for those wanting access to their money.
Keep in mind that it's usually recommended to have at least 3 months’ worth of monthly income in an instant or limited access savings account before you opt to lock your money away.
The decision on whether a fixed rate bond is right for you is ultimately your decision. If you're unsure, you should seek independent advice.
How do fixed rate bonds work?
Fixed rate bonds are available with different terms. The interest rate will typically be different depending on the length of the term. Most fixed rate bonds require a minimum deposit to open the account. Unlike many other savings accounts, you are usually only allowed to pay in once, which is when you open the account.
Providers of fixed rate bonds may give you the option to have earned interest paid out either monthly or yearly.
What does ‘term’ mean?
With fixed rate bonds, the ‘term’ is the amount of time you choose to lock your money away for, e.g. your term could be 1 year, 2 years or 3 years.
What does ‘maturity’ mean?
When your fixed rate bond term ends, your account ‘matures’ and you get access to it. This is known as maturity.
What happens when the fixed term ends and my account matures?
It depends on what provider your fixed rate bond is with.
Here at The Co-operative Bank, on maturity of your Fixed Term Deposit, we transfer your money into an instant access account. This allows you to withdraw your money if you wish to, or reinvest into a different account, either with us or a different provider.
Can the interest rate change?
No, the interest rate is fixed until your account matures.
Are there fixed rate bonds for children?
Yes, some providers offer children’s fixed rate bonds, and some adult fixed rate bonds do not have a minimum age requirement. As children have the same income tax allowance as adults, the interest earned in a child’s name is also liable to tax. You can find more information about interest on savings for children on the gov.uk website.
Here at The Co-operative Bank, you can open a fixed term deposit if you are a UK resident aged 16 or over and have a minimum of £1,000 to deposit.
Can I have more than one fixed rate bond?
Yes, you can have more than one fixed rate bond. One way to manage multiple fixed rate bonds, is to split money between accounts with different terms.
This way, you would always have money maturing whilst maximising the higher return that often comes with longer terms.
However, you'd have to make sure that you wouldn’t need to access your money before the end of the term.
Do I have to pay tax on fixed rate bonds?
Yes, the interest earned on fixed rate bonds is taxable, however, most people can earn some interest on their savings without paying tax.
Depending on what Income Tax band you’re in, you may get up to £1,000 of tax-free interest. Learn more about tax on savings interest by visiting the gov.uk website.
A fixed rate ISA is a tax-free alternative to a fixed rate bond. A fixed rate ISA operates similar to a fixed rate bond in that you can invest a lump sum for a set time at a fixed rate of interest. Some providers allow withdrawals subject to a penalty and others don’t allow withdrawals during the term.
Please note: any reference to tax is based on our understanding of current tax regulations which may change in the future and depends on your individual financial circumstances.
Are fixed rate bonds safe?
Before opening an account, you might ask yourself if fixed rate bonds are safe or if you are at risk of losing your money.
Some providers do allow you to make withdrawals during the fixed term, but often with a penalty such as loss of interest. At The Co-operative Bank, we do not permit withdrawals from our fixed term deposit accounts until the account reaches the end of its fixed term. Once the account has reached the end of its term, you will receive your initial deposit plus the interest that has accrued over the term.
If you choose our fixed term deposit product, you should ensure that you won’t need to withdraw the deposit for the duration of the fixed term. If you think that you may need to withdraw from a savings account, our instant or limited access savings accounts may be more suitable. You can find out more about those accounts on our savings hub.
Can I open a fixed rate bond as a joint account?
Yes, you can usually open a fixed rate bond as a joint account. This also means that the interest earned is split between the two account holders.
Can a fixed rate bond be opened with a Power of Attorney?
Yes, in these cases the interest earned from the fixed rate bond is earned and owned by the account holder, not the attorney.
In summary: pros and cons of fixed rate bonds
Pros:
- Certainty of returns through the fixed interest rate
- Unaffected by Bank of England base rate drops
- Providers often offer higher interest rates
- You can have more than one fixed rate bond.
Cons:
- You cannot access your money in the fixed rate bond until the bond matures
- You will not benefit from rate increases if the Bank of England base rate increases
- Interest earned from your fixed rate bond is taxable if it exceeds your Personal Savings Allowance
- You can usually only deposit funds into the fixed rate bond once, when you open the account.
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Do not opt for a fixed rate bond if there’s any chance that you’ll need your money during the account term — always read the small print carefully
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For our fixed rate bond (known as a fixed term deposit at The Co-operative Bank), you’ll need a minimum of £1,000 to open the account — other providers may require a different minimum deposit
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We don’t allow you to withdraw money before the end of the agreed term, and it can be costly with other providers as penalty charges or a reduced interest rate may apply
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If you need frequent access to your savings, an instant access or a limited access savings account may be a more suitable option for you.
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