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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?
Want to know the difference between a premium bond and a savings account? This guide will explain how each operates.
Because the bank or building society knows it will have the use of your money for the duration of the bond’s term – money held in fixed rate accounts can be used for banks’ funding purposes – it can pay you a higher rate of interest than on an easy access accounts, where it can’t be certain of having your money from one day to the next.
Because the provider wants a certain level of security, a lot of fixed rate savings accounts may not allow you to access your money during the term – and if access is allowed, it’s normally at the expense of a big interest penalty. Therefore, it may be the case that the best fixed rate bonds in terms of interest won’t allow you to make a withdrawal under any circumstance, especially if you choose a shorter-term account. Some longer-term bonds may allow access, but will usually impose strict interest penalties for the privilege.
Fixed rate bonds are still the best way to secure a decent amount of interest on a large pot of money (barring investment on the stock market). So, if you want to set your savings aside and not think about it for a year or five, you would do well to consider the best fixed rate bonds currently available.
Other advantages include knowing exactly how much you’ll get out of the pot, due to the fixed interest, and having your savings shielded from any downturns in the market. Of course, knowing how much interest you will get each year also means you can know beforehand if you’ll need to worry about taxation.
Since any interest above £1,000 is taxed (£500 if you are a higher rate taxpayer and all of it if you pay tax at 45%), those who have a large enough pot for this to be relevant may want to look at fixed rate cash ISAs instead. Alternatively, if you have a small pot of money but would still like to gain a decent amount of interest, regular savings accounts offer high interest rates on monthly deposits of usually up to £500. Or there’s high interest current accounts to consider, to get a potentially great interest rate without having to lock away your cash.
Remember, however, that 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, plus a fixed rate bond for savings you don’t need to keep to hand, as well as maybe an ISA to take advantage of your annual ISA allowance.
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).
The longer you are prepared to not have access to your money for, the higher the rates of interest that will be on offer. Five year fixed rate bonds and four year fixed rate bonds are often the best options if you're looking for the highest rates.
Maybe. Thanks to the personal savings allowance, you can earn up to £1,000 in interest per year in any savings account, depending on your tax status. However, that also means that if you earn more than £1,000 in interest per year, you will have to report this to HMRC and pay tax. Only ISAs allow all interest earned to be tax-free (though they come with many other restrictions).
Most savings providers are backed by the Financial Services Compensation Scheme, which protects up to £85,000 of your savings per banking group. Those providers that are not a part of this scheme (usually because they are not based in the UK) will most likely be part of a comparable EU scheme. You can find out how your money would be protected with a certain account by looking at the details of each account.
That will depend on the minimum deposit requirement, which will be prominently displayed in the details of each account in your search results. Some of the best rate fixed bonds may be the ones with the highest deposit requirement, which means you’d need quite a hefty pot. However, this doesn’t always have to be the case.
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.
Fixed rate bonds may only allow you to make a single deposit at account opening. If you are allowed to make further deposits after opening, you will only be able to do so for a limited amount of time or while the bond is on offer to new customers (sometimes referred to as ‘while the issue is open’, which means that once it is withdrawn from sale, you cannot add to your savings pot).
So, if you’re looking for a savings account that will allow you to add to your savings, a fixed rate bond is not for you. You could try a regular savings account, or a variable rate easy access or notice savings account instead.
Most fixed rate bonds will pay interest every year, allowing you to benefit from the positive effects of compound interest over a longer term. Some bonds, however, may pay interest only when the term ends and the bond matures, while some other bonds may require interest to be paid away, which means the interest wouldn’t be compounded over the long term, but rather placed into a designated current account. Providers may also offer an option whereby interest is paid monthly, which (if the interest is paid away) allows savers who use their interest as income to get a regular, set monthly payment from their savings.
Overall, the longer you can bear to part with your money, the higher a rate you will be able to get. That’s why the best fixed rate savings accounts are those that won’t let you access your money for at least five years. On top of this, you will get a bigger return if you pick a deal that allows your interest to be compounded, but if you want an income from your savings while you wait for the bond to mature, you should choose a bond that allows interest to be paid away instead.
Compare fixed rate bonds and figure out what works for you to find the best deal for your situation.
Be sure to keep track of when your bond ends. Your bank or building society will normally write to you as the bond approaches the end of its term to ask what you want to do. If you don’t hear anything, your money may be re-invested in another fixed rate bond or a variable rate maturity savings account, which may not pay as competitive an interest rate.