Fixed rate bonds often pay the highest rates in the savings charts, but for those considering one of the these accounts the better rates usually come with significant restrictions. As such, when looking at fixed rate bonds it is important to be aware of both the advantages and disadvantages of these accounts to ensure that it is the right choice.
To help savers choose whether or not a fixed rate bond is the right type of account for them, here we’ve highlighted the advantage and disadvantages of these accounts.
One of the main reasons why savers choose a fixed rate bond is that, as already highlighted, they tend to offer the best rates. For example, the best rate in the fixed rate bond chart today is 1.80% AER, this is 1.15% higher than the best easy access savings rate of 0.65% AER and 0.80% better than the best notice account rate of 1.00%.
As well as this, unlike an easy access savings account or a notice account where rates can change at any time, with a fixed rate bond once savers have deposited their money into the account they can guarantee that they will continue to get that rate until the account matures. This means that once the account is open savers do not need to look at moving their money to a new account if rates start to be reduced.
Another benefit of a fixed rate bond is that savers can open as many accounts as they want. This helps those with a large amount of savings to ensure that all their savings are protected under the Financial Services Compensation Scheme (FSCS), which sees funds of up to £85,000 deposited into banks and building societies under one banking licence protected – more information about this scheme can be found here.
What makes some savers cautious about depositing money into a fixed rate bond is that most banks and building societies will not allow savers to access funds once the account is open. Those that do allow savers to withdraw funds usually comes with some restrictions, for example having to close the account, as well as an interest-loss penalty. This means that savers must be certain that they will not need to access their savings once the account is open.
As well as this, as savers cannot access their savings if inflation starts to rise and their money is locked into a fixed rate bond that has a rate that is below inflation it could see the value of their savings erode. Alternatively, if savers lock their money into a fixed rate bond while rates are high and inflation falls or banks and building societies start reducing saving rates, they could see their savings benefit from being locked into the fixed rate.
Another disadvantage is that usually further deposits are not allowed once the account is open. As such, fixed rate bonds are normally better suited to savers with a lump sum of money they are looking to save rather than those looking to build up a savings fund.
One compromise for savers looking to benefit from the higher rates offered by fixed rate bonds but who are concerned about locking their money into an account over a long period of time is to opt for short-term fixed rate bond. Although savers will often get a lower rate on a one year fixed rate bond compared to many five and seven year alternatives, locking their money away for just 12 months will help to lessen the impact of rising inflation. Despite paying a lower rate than many longer-term fixed rate bonds, the top rate on a one year fixed bond is still higher than the top easy access savings account rate. For example, the highest one year fixed bond rate in the chart today is 1.38% AER, which is 0.73% than the current highest easy access savings rate.
Savers should be aware that, as with all fixed rate bonds, usually a one year fixed rate bond will not allow them to access their savings so those who think they may need to dip into their savings during the 12 month period may want to consider an easy access account or notice account instead.
Eligible deposits with UK institutions are protected by the Financial Services Compensation Scheme (FSCS) up to a maximum level of protection of £85,000 per person per institution. All new savings or bank accounts provided to UK customers are now covered by the FSCS.
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