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Every basic rate taxpayer in the UK currently has a Personal Savings Allowance (PSA) of £1,000.
How are my savings taxed?
There can be many reasons why you might find a two year fixed rate bond an attractive option. Primarily, these will tend to offer better interest rates than, say a one year fixed rate bond or easy access account. In return for your agreement not to touch the funds you have deposited, the bank or building society can offer you a better rate that is fixed for the duration of the bond. For people who are able to put these funds aside for the duration, they offer a safe and consistent way of earning a decent return. However, it must be stressed that before investing, you are certain you will not need access to these funds – in many instances withdrawals will not be possible and even if they are there will be heavy penalties in terms of loss of any interest you may have already earned. On the other hand, you might feel that you could commit your money for longer and reap an even better return. In that case, you might want to consider a three year fixed rate bond.
When thinking about taking out a two-year fixed rate bond, you should also consider what you think will happen to interest rates over this period. If rates go up you could find that your bond is paying less than the top rates available and to make matters worse, it may be expensive or impossible to move your money before the end of the term to capitalise on better returns. If rates go down, or remain broadly the same, you’ll earn more than if you had kept your money in the best-paying easy access account.
Simply put, in most instances you will not be able to withdraw the monies you have invested until the bond matures. Where withdrawals in full or in part are allowed, you’ll find that you will be penalised by the loss of a significant amount of interest. In some cases, this can be all the profit you would have made up to the point that the withdrawal is made. Individual bonds will each have different rules on what is permitted, and you are strongly encouraged to take these into account before committing your funds.