Fixed rate bonds

Fixed rate bonds are an important and a popular part of the savings market but there can be confusion surrounding the actual term ‘fixed rate bond’, or ‘fixed rate ISA’ so it’s important to tread carefully to make sure you are signing up to what you expected.

What is a fixed rate bond?

This type of savings account offers a fixed rate of interest for a fixed period of time, which typically ranges from one to five years, although there are both shorter and longer terms available.

You’ll know exactly what interest you will receive at the end of the term, although you will be tied into the account for the whole period, as generally, you will not be able to access your funds at all before maturity, except in the event of your death – at which point the estate can often choose to close the bond – or retain it until the normal maturity date.

What each bank or building society will allow can be very different, so it’s important to understand the restrictions before you invest.

The reason that fixed rate bonds and ISAs are very popular is that they tend to pay better rates of interest than accounts that offer more access. So if you don’t need your cash in a hurry, they can help to boost your return.

Essentially, in exchange for a fixed return, you agree to stay put in the account, which is great if rates are falling, but the opposite is also true; if interest rates are improving, you may find that the rate you have tied into is no longer competitive.

But if you do nothing while you wait for something better to come along, you are missing out on the higher interest in the meantime. It is also worth noting at this point another type of cash savings account, which works in a similar way to a fixed rate bond.

Latest savings rates

What is a Sharia bank account?

Sharia bank accounts provide many of the same features as regular bank accounts, but don’t pay interest or offer overdraft facilities, as the principle of paying or receiving interest is against Islamic law. Instead, Sharia accounts pay a share of profits received from the bank’s investment activities in the form of an Expected Profit Rate (EPR).

Money invested through a Sharia compliant bank avoids businesses forbidden under Islamic law such as gambling and tobacco, so could also be considered by savers looking to invest their cash more ethically. Remember, anyone in the UK can apply for a Sharia account. 

Much like interest rates, expected profit rates are not guaranteed. However, should a Sharia bank fail to continue paying its expected rate, savers are usually given the option to switch accounts without penalty.  Failing this, as with any cash savings account, cash fixed rate bonds, cash ISAs and Sharia fixed term accounts do not pose a risk to your cash, as long as you keep the amount within the Financial Services Compensation Scheme (FSCS) limit of £85,000 per person, per banking licence.

If you do this, even in the worst case scenario that the provider you choose goes out of business, your cash will be protected. 

But not all accounts that include the term bond in the name are cash savings accounts. 

What are the different types of bonds?

The term bond is a widely used term that mainly refers to products in the investment market, such as Government Bonds (GILTs), Corporate Bonds and Offshore Bonds. It is important to remember these can pose different risks to investors and should not be confused with a cash fixed rate bond, which can benefit from protection from the FSCS. 

Increasingly in recent years, there have been alternative forms of so-called savings accounts, such as peer-to-peer lending, which often use the term ‘bond’ in their marketing and literature and can easily be mistaken for a savings bond.

 When investing in a bond, it is crucial to ensure you know what you are buying into. That is why consulting a good reputable financial adviser is key.

 We’re not saying that there is necessarily anything wrong with these products – although there have been some high profile disasters - but it’s important to ensure that you really do understand what you are putting your savings into, how it differs from cash and that you understand the risk implications, before you make any investment decisions.

The Financial Services Compensation Scheme (FSCS) does not apply to peer-to-peer products and even if the investment product protection does apply to other types of bond, it is not as straightforward as the cash deposit protection as you would need to prove that you have received bad advice if the investment fails. Investment FSCS protection doesn’t kick in due to poor stock market performance for example.

This is a very different scenario and offers far less protection than you would have in a cash-based savings account, which is a simple, guaranteed £85,000 per person, per banking license if the bank fails.

How safe are fixed rate bonds 

Like other savings accounts, money placed into a cash fixed rate bond can be protected by the Financial Services Compensation Scheme (FSCS). 
The FSCS automatically protects your cash if your bank or building society goes out of business.

The protection level for cash deposits is £85,000 per person, per banking licence – so it’s important to check if your savings provider is under the same licence as another. For example, Cahoot and Santander share a licence, or Bank of Ireland and the Post Office share a licence. This means that the £85,000 limit applies to the amount held in total over the linked providers. So, if you have £50,000 with Santander and £50,000 with Cahoot, £15,000 would not be protected.

But savers looking to boost their returns can be tempted by ‘bond’ products that are passing themselves off as deposit savings accounts but are actually investments, which can be far riskier than a cash account – or they may simply be scams.

In this day and age of internet scams, it makes sense to be cautious of any unsolicited emails that offer savings accounts that seem too good to be true. But there are simple things that you can do to protect yourself. First, check with trusted Best Buy tables such as those with SavingsChampion.co.uk, to make sure any account you are interested in is included. Unlike some alternatives, SavingsChampion monitors the whole of the UK savings market and the tables are uncompromised and unbiased. If the rate you have seen is paying more than the top five in the best buy tables, you should make more enquiries. You can check on the provider’s website but don’t click a link on the email you’ve received. And if you want to be really sure, you can look for the bank in question on the FCA register and use the contact information found there. There are instances though where the brand name will not appear, so instead look for the parent company. Once again Cahoot is an example of this. Cahoot does not appear on the FCA register as it’s a division of Santander. And another regular to our best buy tables, Smart Save is the trading name for Chetwood Financial Limited which is the company that is on the FCA register.  

What happens when the fixed term ends?

Your savings provider will write to you as your bond nears the end of the term, giving you the options, which will include returning your money, and perhaps rolling over into another bond. 

If you fail to act, what happens next depends on the terms and conditions. Sometimes the maturing funds will automatically be returned to the customer, or may be switched into an easy access account, usually paying a very low rate of interest while they wait for instruction. But on some occasions, the funds will be rolled over into another bond of the same term and in this case you may not be able to access your money until the maturity of the new bond. So, it makes sense to make a diary note of when your funds are maturing, and look out for any correspondence from your bank or building society.

Do you pay tax on fixed rate bonds? 

If you are a taxpayer, then you will need to pay tax on a standard fixed rate bond, as you would with any savings account, unless your cash is in an ISA, which is a tax free account.

Since its introduction in 2016, many savers will have a Personal Savings Allowance (PSA), which means that basic rate taxpayers pay no tax on the first £1,000 of interest that they earn from their savings account, for higher rate taxpayers the allowance is £500. Additional rate taxpayers don’t have a PSA. And if your income (excluding your cash savings interest) is less than £17,570 a year, you may also be eligible for the starting rate for savings, which means you could get up to £5,000 of interest that you do not have to pay tax on. For more information speak to your accountant or financial adviser.

If you receive interest in excess of the applicable PSA limit, then the onus is on you to make sure that you pay the right amount of tax that is owed.

In many cases, the tax will be collected automatically through the PAYE system or through a self-assessment, if you need to complete one.

But with the PAYE system, your tax code will be amended to allow for the assumed amount of interest you could be earning, rather than the actual amount. So if your circumstances change, your tax code could be wrong and you could end up paying more or less tax than you should be. As a result, it’s important to keep an eye on your tax code and contact HMRC if they have inaccurate information about the level of tax you expect to earn on your savings.

How can we help? 

Our advisers have decades of experience in advising on cash, investments and financial planning needs. They can help you to understand which bonds are protected and which are not.

If you would like more information get in touch today and arrange a free initial consultation. 

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