The difference between a savings account and a savings bond

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 provider has chosen to name them, there are a few key differences between a savings bond and a normal savings account. Read on to find out what they are.

• A savings bond will run for a set period of time, usually anything from a few months to five years, or even longer in some cases.
• The word "bond" means that you are tied to something; you may find yourself more "tied in" than with a normal savings account. Typically, you’ll be required to leave your money untouched for the full length of the term.
• Some bonds will allow earlier access, but usually on an interest penalty – which means you’ll have to sacrifice some interest to withdraw your money before the term ends.
• You won’t normally be able to add additional funds during the term, which makes bonds more suitable for those who have a lump sum they want to save.
• Given the fixed term commitment, a savings bond typically pays a fixed rate of interest (some will occasionally pay variable rates, but this is uncommon), and the rate will often be higher than for a standard savings account, as you’ll need to be able to commit your savings for the set period.

When your bond comes to the end of its term, there are a few things that can happen. Your money could be transferred to a low-paying “maturity savings account” from which you can withdraw the money; the money could be paid back into the account it originally came from, or the money can be put into another savings bond of the same length. Your provider should contact you to ask what you want to do at the end of the term, so make sure your contact details are up to date. 

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

• A normal savings account has no set term.
• They typically pay variable rates of interest, which will usually be lower than on fixed bonds as you’re not locking your funds away.
• Savings accounts tend to be more flexible than their fixed bond counterparts: easy access accounts are common, whereby you can add and withdraw funds as you wish (though some have restrictions on the number of withdrawals that are allowed each year), and you’ll also find notice accounts, which allow access to your funds provided you give sufficient warning to your savings provider.
• Access is typically penalty-free (unless you breach the notice requirements of a notice account), so you’re not tied into anything. This makes them perfectly suited to emergency funds.
• Deposit requirements tend to be lower than for fixed rate bonds, making them ideal for those getting into the savings habit or who don’t know how much they can commit. Because they can be added to at any point, they’re more suited to those who want to save regularly.

So, a savings account is typically far more accessible than a fixed rate bond, and because of that, will generally pay a lower rate of interest. They’re often variable, which means the rate can potentially change at any time, so you’ll want to regularly review your account to make sure it’s still offering the returns you want. Bear in mind too that some savings accounts come with a bonus element included in the rate that can drop away after a certain length of time (typically 12 months), which means it’s even more important to review the account at that point.

The upside is that, because your money isn’t locked away, you can typically move your funds to a better rate without penalty, unlike with a fixed rate bond where you’d be tied in for the term, even if rates elsewhere in the market started to rise. No matter which kind of account you choose – traditional or fixed bond – remember that your money is protected by the Financial Services Compensation Scheme (FSCS), and that tax treatment is the same, with the Personal Savings Allowance meaning you can earn up to £1,000 in interest each year entirely tax-free.