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What is a savings bond?

What is a savings bond?

Category: Savings

Updated: 31/01/2017
First Published: 30/01/2017

Have you ever asked yourself: what exactly is a savings bond, and how does it differ from a savings account?

The common confusion around these two terms lies in the fact that they are so similar.

In fact, a savings bond is also a type of savings account! So why call them by different names? In truth, more and more banks and building societies are calling savings bonds "savings accounts" in an attempt to make things simpler.

However, whatever the particular provider has chosen to name them, there are a few key differences between a savings bond and a normal savings account:

  • A savings bond can have a variable rate of interest (so it could pay less or more than the interest rate you start with over the term), but more commonly will have a fixed rate.
  • A savings bond will run for a set period – usually anything from a few months to five years, or even longer in some cases – as opposed to a normal savings account which has no set term.
  • The word "bond" means that you are tied to something. With a savings bond you may find yourself more "tied in" than with a normal savings account.
  • It can cost you a lot of interest to come out of a savings bond if you need earlier access to your money or you may not be able to withdraw your money at all during the term.
At the end of the term of a savings there are generally three main things that can happen:
  • Your money could be transferred to a low-paying "maturity savings account" where you can then withdraw the money from;
  • The money must be paid directly back to the account it originally came from; or,
  • The money may be put into another savings bond of the same length.
Your provider willalways contact you to ask what you want to do at the end of the term, so be sure to review your savings arrangements and give them your instructions - this is particularly the case if the funds will be placed into another bond if you don't instruct the ban otherwise

It's important to understand that as savings bonds are still savings, they are protected by the Financial Services Compensation Scheme in the same way as a normal savings account – that's up to £85,000 per person (together with any other savings accounts you hold) for each bank or building society.

You're also taxed in the same way as a normal savings account.

Interest earned on a savings bond

The big advantage of a savings bond is that the rates of interest you can expect to earn are generally higher, as you need to be able to commit your savings for a set period.

So, to summarise: a savings bond is basically a more restrictive type of savings account which, because of this restrictiveness, generally pays more interest in comparison.

Be careful not to confuse a savings bond with an investment bond. With a savings bond, your money is safe from decreasing in value due to a poorly performing investment; this may not be the case with an investment bond.

What Next?

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Unsure of who is protected by the FSCS Depositor Protection Scheme? - Check out our detailed chart with all participating providers

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

 
 
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