Best Fixed Rate Bonds

Fixed rate bonds explained

Fixed rate bonds are a type of savings account that offer a fixed rate of interest for a set length of time, also called the term. This means the bank or building society cannot change the interest rate during the term of the bond and you may not be able to access your funds at all until the term ends.

The terms of fixed rate bonds can range from six months to more than five years. You should consider how long you can go without access to your funds before deciding on the best term of fixed rate bond for you.

Fixed rate bonds are a type of cash savings accounts and this means there is no risk to your capital. Furthermore, fixed rate bonds held with a UK authorised bank or building society are also protected by the Financial Services Compensation Scheme (FSCS). Our depositor protection guide includes a full list of authorised UK banks including those that share their banking licence and protection with other or parent brands. 

Most fixed rate bonds only allow a single lump sum deposit when you open the account. This means when you open a fixed rate bond you should have your money ready to transfer as one deposit. However, some do allow further additions for a short period after the account is opened, or while it is still available to new customers.

Some fixed rate bonds offer compound interest, and this can help your savings to grow faster. This means the interest earned is added to your savings balance, usually annually, and any future interest earned is then calculated using the savings balance plus previous interest added to the account. Find out more about how compound interest works.

Banks and building societies can offer fixed rate bonds with higher interest rates if you have a higher opening deposit. The table above can be filtered to show the best fixed rate bonds based on the opening deposit.

Some fixed rate bonds allow savers the choice of when you earn your interest. The best fixed rate bonds offer savers a choice of when this would be and some of the options include monthly, quarterly, annually or on anniversary of opening the account.

Fixed rate bonds are the best way to secure the greatest amount of savings interest on larger sums of money of a few thousand pounds or more. They offer many advantages over other more accessible accounts such as easy access savings accounts, including the certainty of how much interest your savings will earn you, no restrictions on the number of fixed rate bonds you can open (although some banks and building societies will have a maximum balance) and the ease of being able to see if you might exceed the Personal Savings Allowance (PSA).

Fixed rate bonds offer two ways to calculate the interest they will pay. Right now, 99% of banks and building societies with a fixed rate bond set the interest rate directly themselves. The other approach is something called a tracker bond, which use a fixed interest rate to track against the Bank of England base rate. These were more popular many years ago when interest rates were much higher. They work by having a fixed tracking rate, let’s say 0.5%, above the Bank of England base rate. 

We show nearly all of the fixed rate bonds available in the UK, meaning you can be confident you will see the best fixed rate bonds when using our chart above.

Fixed rate bonds offer certainty of return and security for your savings. Over the longer term, say 10 years or more they are unlikely to make the same returns as investing in the stock market. But, they also avoid the risk of losing your capital and remove the volatility of the value of money due to stock market fluctuations. They should be considered as part of a savings portfolio, where you have easy access accounts for money as a rainy day or emergency fund, fixed rate products for guaranteed returns and then investments for potential stronger returns over the longer term.

No, all the fixed rate bonds shown on Moneyfactscompare.co.uk are not connected to the performance of the economy and therefore a recession has no impact on the return you will receive. This is also true if there is a stock market crash, bonds remain separate to this performance and are therefore not affected. This means the returns offered when you open the fixed rate bond are guaranteed as long as these are maintained until the maturity date.

Bonds require you to keep your money in the account until this matures, meaning that if you have an emergency and need the money it may not be available or it may reduce or remove any interest earned. The interest is fixed for a fixed rate bond, while this brings certainty of return it does mean you will not gain any benefit if interest rates increase in the future.

Those with larger sums to save could choose to invest in the stock market, however your capital is at risk and your returns can be volatile depending on the performance of the markets. High interest current accounts and regular savings accounts are other alternatives to earn good rates of interest, but these often have a cap on the maximum balance allowed of usually a few thousand pounds.

There is nothing stopping you from having several different types of savings accounts. Indeed, it would be quite sensible to have an easy access account for emergency funds, a fixed rate bond for savings you don’t need to keep to hand, and an ISA if you want to take advantage of saving in a tax-efficient way.

You can have as many bonds as you like. You will of course have to adhere to all the limitations on each bond, such as the minimum investment and access restrictions. You’ll also have to keep track of all your different bonds to make sure you don’t breach your personal savings allowance (and so you can report it if you do breach that limit).

Most fixed rate bonds pay interest every year and this means the interest you earn is compounded over the longer term. When interest is compounded, this means your interest is added to your savings increasing your total balance. The next time your interest is due this is calculated on the larger sum of money. As a result, your savings can grow even more.
Some fixed rate bonds will only pay interest when the term ends, meaning interest is only applied to your

initial opening balance. Other bonds may make you have your interest paid into a separate account, again limiting your ability to earn compound interest. Our chart above shows which accounts offer compound interest – just look at the further details tab.

Other fixed rate bonds pay interest monthly, this can be used as an income if paid into another account or compounded if added to the fixed rate bond balance.

Most of the time you cannot access your money in a fixed rate bond until the term has finished. You may decide that the best fixed rate bond for you is one that allows withdrawals, just in case of emergencies. You should be aware that there may be a penalty to do so and this is usually a reduction in the interest you will earn. This is called an ‘early access penalty’ or ‘interest penalty’. In rare cases you may find this penalty eats into your savings balance. If you need to withdraw your money you will nearly always need to close your account afterwards.

Fixed rate bonds that allow some access before the end of their term may impose a flat loss of interest penalty, no matter when in the term you make the withdrawal (so, 180 days’ loss of interest, for instance). Others may taper the penalty depending on when the withdrawal is made (for example: 365 days’ loss if the withdrawal is in the first year, 320 days’ loss if the withdrawal is in the second year, etc.). Be careful, though, as this means that if you were to withdraw funds from a bond with a 180-day loss of interest penalty after just 160 days, for instance, you could actually lose money.

This depends on the terms of the fixed rate bond. Some will allow early closure but often at the cost of an interest penalty. Others will not allow early closure at all, meaning you must wait until the fixed rate period ends to reclaim the funds deposited.

Some bonds run for the term from the date they are opened and funds deposited, while others will have a set end date no matter when the account was opened. The most common terms are one-year fixed rate bonds, two-year fixed rate bonds and five-year fixed rate bonds.

Generally, short-term fixed rate bonds include those with terms of six months, nine months, one-year and 18-months.

Find all the best two and three year fixed rate bonds using our charts.

Generally, long-term fixed rate bonds include those with terms of two years up to five years. Although there are fixed rate bonds of seven years or more available.

You must pay tax on the interest you earn from savings and investments if these exceed the Personal Savings Allowance. The Personal Savings Allowance allows you to earn interest up to a set level tax-free. The Personal Savings Allowance for basic rate taxpayers this is £1,000 and for higher rate taxpayers £500. If your interest earnings exceed this then you will need to declare this to HMRC and pay tax at the relevant rate.

If your income is less than £17,570 you also benefit from a top up called the ‘starting rate’ to add to your Personal Savings Allowance. This gives those with earnings of £12,570 or less an additional £5,000 of tax-free interest. Those earning more than £12,750 will still get the starting rate but the value of this decreases by £1 for every £1 of additional income.

Savers can also use ISAs to save and not pay tax on balances of up to £20,000 per tax year, but they do come with rules about how to maintain their tax-free status. Find out more about how ISAs work.

However, most savers will find they do not need to pay tax due to the Personal Savings Allowance and can therefore compare the best savings rates across the whole range of savings types to get the best returns.

Find out more about the Personal Savings Allowance in our guide how are my savings taxed?

You will receive the full amount of interest agreed when you opened the fixed rate bond as long as this remains in place until the bond matures. If you close the bond early, then you will most likely be penalised for a set amount of interest as outlined when you took out the bond. There are very rare occasions where this penalty could exceed more than any interest already earned and therefore your capital is required to pay this off. Ultimately when opening a fixed rate bond you should do this on the basis that you know you can do without the funds for the fixed term.

If the bank or financial institution fails, then your deposit will be protected up to the sum of £85,000 under the Financial Services Compensation Scheme (FSCS).