3 Year Fixed Rate Bonds

While instant access and easy access and notice accounts provide very short term solutions if you are prepared to tie up capital for a set period of time a fixed rate bond could be right for you.

Different terms are available  with many savings providers offering 1 year, 2 year, 3 year and 5 year fixed rate bond options. 4 year fixed rate bonds are less commonly available.

• For savers who are prepared to lock capital away for a 3 year period, a 3 year fixed rate bond will generally offer a higher rate of interest than a shorter term account. Some providers offer 3 year fixed rate cash ISAs so you benefit from tax free interest returns.
• 3 year fixed rate bonds normally have a minimum subscription age of 18 but some providers offer fixed rate bonds to younger savers.
• Normally there is a minimum commitment for depositing money into a 3 year fixed rate bond – usually around £1,000, but this can be more.
• With a 3 year fixed rate bond savings providers do not normally allow you to access your money during the savings term and if they do there are normally conditions which may involve a loss of interest so ensure you read the terms and conditions before you sign up. Some fixed interest providers will allow withdrawals during the two year term but there may be interest penalties.
• The savings interest you earn during the 3 year fixed term is treated as income and you may have to pay tax on it depending on your circumstances. If you don’t pay tax you can receive interest gross if you complete HMRC tax form R85 which is available from your savings provider or directly from HMRC. Some fixed rate savings accounts will pay interest gross and it is up to you to declare any tax owed to the Inland Revenue. Some 2 year fixed rate bonds pay interest monthly, quarterly, annually or on maturity which allows you to plan you tax planning.
• Fixed rate bonds are cash deposit based and you will get back your original deposit plus any interest owed unless the bank or building society gets into serious financial difficulty. In the unlikely event that the fixed rate bond provider defaults the FSCS (Financial Services Compensation Scheme) would pay compensation of up to £85,000 per account holder per authorised institution.

Some fixed rate bonds pay interest on maturity rather than on a monthly or annual basis and in this respect the tax you pay will be determined by your tax status at that point. This can be useful for tax purposes if you know your tax status will change in the future.

The length of term you opt for should be carefully considered. If there is a chance you may need your capital earlier before the 3 year term is up consider a shorter deposit term. If you need rapid access to your cash, a 5 year bond is probably not the best option.

Minimum deposits usually start from £500. It is important to note that some 3-year bonds don’t allow you to top up your money during the fixed term, so check the terms and conditions if this is important to you.

Withdrawals are either not permitted or restrictions will apply. Read the bond provider terms and conditions so that you know what you are getting into. Some bond providers, for example, will allow withdrawals during the bond term, though penalties may apply.

Advantages of Fixed Rate Bonds

• The interest rate offered is guaranteed for the 3 year term of the bond. This is unlike instant access savings accounts where the interest rate can go down or up at short notice.
• Different banks and building societies will have different views on medium to long term interest rates. If interest rates rise more slowly than expected a fixed rate bond may give you a better return than what you could expect from an instant access account.
• Some fixed rate bonds provide flexibility e.g. 1 withdrawal over the term.
• Fixed rate bonds range from 2 months to 5 years in duration so you can choose a term that suits your circumstances
• Many fixed rate bond providers offer online access so you can see how much interest you are earning.

Disadvantages of Fixed Rate Bonds

• The benefit of enjoying a higher rate of interest must be weighed against tying up your capital for a fixed term. If you need access to your capital before maturity this may not be possible and if it is there may be interest penalties.
• If interest rates rise over the term of the investment you may find the interest rate on your capital is no longer competitive compared to new offerings in the market.
• Many fixed rate bond providers require a high minimum deposit e.g. £5,000