If you are a saver, then it’s important that you consider all of the options open to you before you commit your money to any one savings vehicle. And, with so many products on the market, it’s more than just a case of finding the product with the best interest rate.
For instance, you need to consider whether you will need instant access to your money or whether you can tie it up for a period of time; or whether you want to get the benefits of an ISA or even save your money in an offshore account, have a look at Moneysupermarket.com to help you search for the best option.
And then there are stocks and shares investments to consider.
But if you don’t want to risk the stock market and would prefer a guaranteed return on your investment, then a fixed rate bond could be way to go.
What is a fixed rate bond?
As suggested by the name, a fixed rate bond pays a fixed rate of interest for a set term, which is usually between one and five years, and even if the Bank of England rates move up or down, the bond’s rate will remain the same, guaranteeing a fixed return on your investment.
The general rule of thumb is that the longer the term, the better the rate of interest but it is worth noting that bonds usually only allow one cash deposit to be made when the account is opened, this means no further money can be added at a later date.
However, some fixed rate bonds will allow for further deposits to be made while that particular bond – known as an ‘issue’ - is still available, which is usually for a period of between two and eight weeks.
Another feature is that withdrawals cannot usually be made from fixed rate bonds until the term is up. Although there are exceptions to this, any withdrawals are usually subject to penalty charges which can be anything from 90 to 180 days’ worth of interest.
So it’s probably best to leave your cash alone for the length of the term.
Advantages of a fixed rate bond
There are several advantages to putting your savings into a fixed rate bond, one being that you can often get a better rate of interest than if you kept your money in a variable rate easy access account.
The fact that the rate is fixed can also be seen as an advantage as you don’t have to worry about your bank or building society cutting the rate if the economy takes a turn for the worse, however…
Disadvantages of a fixed rate bond
…this can obviously work the other way and, should interest rates start to rise, you could be stuck with a rate that becomes uncompetitive.
Another disadvantage of a fixed rate bond is that your money is tied up for the term of the bond and so you will not be able to get to your cash, at least not without being charged a penalty.
However, this is only a problem if you need to get your hands on your money and, if this is the case, it may be a good idea to use a fixed rate bond as part of a more flexible savings plan. For instance, you could invest a portion of your savings pot into a bond to take advantage of the favourable interest rates and then put the rest into an easy access account in case you need to get your hands on some funds without having to pay a penalty.
How to get a fixed rate bond
Most banks and building societies offer fixed rate savings bonds and you can also use a comparison site, such as MoneySupermarket, to instantly compare a range of bonds and find one that suits your circumstances.
Bonds can usually be opened online, by phone or in branch if you are dealing with a bank or building society. You will need to have your identity verified when opening a bond so be sure to make sure that you have a valid passport or driving licence to hand as well as a utility bill to confirm your address.