How Fixed Rate Bonds differ from your average savings account

Fixed Rate Bonds have several differences to typical savings accounts. To start off, they count as more of an investment. Some people would go as far as to call them a form of gambling, as they can be very profitable if opened at the right time, but carry an element of risk.

However, Fixed Rate Bonds are extremely safe investments, as the only thing you're gambling with is your interest, much the same as premium bonds. The golden rule with any savings account is to stick to banks registered with the Financial Services Authority (FSA) and never let your investment exceed the protection limit offered by the banks compensation scheme. All banks registered with the Financial Services Compensation Scheme (FSCS) cover accounts for up to £50,000 (£100,000 for joint accounts), so in this case you would invest up to £50,000 with any one bond. It is also worth noting that your balance will increase as you earn interest, so it might be an idea to invest slightly less, or even open a seperate account to have your interest paid into. For a list of banks together with the compensation scheme they are a member of, and which banks fall under the same financial institution, thus offering one compensation limit across several banks, check out the List of Banks by Institution hub.

Unlike normal instant access savings account that see lots of activity with continued deposits and withdrawals, Fixed Rate Bonds tend to only allow one initial deposit upon opening the account, then the bond is left to grow for the agreed term. At the end of the term you are reunited with your money with the added interest.

Fixed rate bonds come with a fixed term – which is the period of time you agree to lock your money away for, and a fixed rate – which is the rate agreed at which your money will grow. Most fixed rate bonds do not allow withdrawals throughout term, but in an emergency you are able to access your account, however this can prompt your account to close and you could lose any interest earned to date.

Another difference with fixed rate bonds is that the rate at which is agreed when opening the account will stay the same, without reflecting any changes made to the Bank rate. So for example, if you open an account that pays 6.5% for a 12 month period, over the course of the following 6 months the Bank of England cuts its rates down to 4%, you will still be getting 6.5% until the term ends.

This can also work against you, as rates could rise, making your rates seem less attractive compared to instant access accounts and fixed bonds offered to new customers.

These types of savings accounts are ideal for those that would rather not take any big risks. They offer a guaranteed return providing you with predictable income and you can expect to get more attractive interest rates than you would using other savings accounts.