Selecting the Best Fixed Rate Bonds for You

Saving money is difficult for many people, but if you are in a position to put some money away, fixed rate bonds offering higher interest rates and limiting access to your money (which can help you avoid impulse withdrawals) can be the best savings option.

It can be a daunting experience trying to determine which are the best fixed rate bonds to suit your circumstances, as there are so many providers and multiple options and conditions applying to each. The financial institutions offering the best bonds also vary from time to time, but fortunately comparison websites such as uSwitch can make the task easier. These sites sometimes offer special rates that are soon removed, and it can therefore be beneficial to apply sooner rather than later.

Best Interest Rates

The best fixed rate bonds available in the UK offer a higher interest rate than is available on at-call accounts, but interest rates are historically low and rates for long-term savings have been hit by the Funding for Lending scheme that began in 2012. This scheme makes funds available to banks for lending out to businesses, but the side effect has been that savers have become less attractive as a source of funds than they were in the past. Nevertheless, even in this environment, a fixed rate bond can still be a good option for saving.

The interest rate depends on the length of the fixed term, with longer periods yielding greater interest rates. The Bank of England recently predicted that interest rates are likely to remain low for at least another three years, but some analysts predict that rates for fixed term accounts could rise, at least a little, in January 2015, when the Funding for Lending scheme ends. If you decide to lock your money away for, say, five years, you could lose out if interest rates do begin to rise again before the term is over.

In today's market interest rates of 2.5% or lower are common, even for substantial balances and fixed terms of five years. If you are considering a fixed term of this length, another thing to consider is whether an interest rate that is below the inflation rate after you pay tax (if applicable to you) means the interest will be reducing in value in real terms. In this case, a shorter term might make more financial sense for you.

Foreign or UK Company?

Many of the financial institutions offering fixed rate bonds to UK customers are foreign-owned, and in deciding which is the best bond for you this may be a consideration. You might, for example, ask yourself how you want your funds invested by the bank, and whether you want the money to stay in the UK, or are happy for profits to go offshore.

Protection of Deposits

UK laws ensure that deposits are protected, and most fixed rate bonds are protected by the Financial Services Compensation Scheme (FSCS), which guarantees to cover savings up to £85,000 in UK institutions. The FSCS passport scheme also protects investments made with foreign banks, and in these cases the amount covered varies for different countries.

Access to Funds

Another aspect to consider in deciding which are the best fixed rate bonds for your circumstances is the restrictions on access to the money should you need it. In many cases you will not be able to make withdrawals at all, but can access the money by closing the account early — usually with the loss of interest for a period of up to a year.

Minimum Balance

The minimum balance required for a fixed rate bond varies widely, from £500 to £10,000 or more, and you will need to take this into account when selecting the best bond for you. It obviously depends on how much money you have to invest, and your choices will be more limited if you only have £500 to put away. Even so, good options are available, and if you have more money it is not always best to choose a bond with a larger minimum balance.

Summary

Fixed rate bonds can still be a good way to invest your hard-earned money, especially if they are one part of a mix of savings, with some funds deposited in a fixed rate bond to take advantage of the higher interest rate, and some in a more flexible account with greater access and a slightly lower interest but one which may rise.

Author Sam Jones often refers people to this page on uSwitch.com http://www.uswitch.com/savings-isa/fixed-rate-bonds/ for best fixed rate bonds and other competitiive financial products