Five questions about: Fixed rate bonds

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The Independent Online

What is a fixed rate bond?

A fixed rate bond is a cash savings account that pays a fixed rate of interest for a set term – usually between six months and five years.

Typically only one deposit is allowed at the time the account is opened so they are aimed at savers with a lump sum to invest.

Can the money be accessed during the term?

Most fixed rate bonds will not allow any access to the savings during the term, except in cases where the investor has died. However, some do allow savers to close the account early by sacrificing a number of days' interest.

What happens when it matures?

According to HSBC research, more than 5.5 million fixed rate savings products worth more than £110bn will mature this year, so what happens to the money? Most accounts automatically transfer the money into a "maturity bond" or another default account and the interest rates paid on these tend to be very low.

With some fixed rate products, customers nominate an account at the time of opening into which their funds are transferred when the bond matures. Others invite savers to nominate a new account when they write to remind them their bond is maturing, for example, the AA requests instructions from savers at least 14 days before the end of the account.

Will the bank inform savers when the term ends?

Banks and building societies should contact customers when their fixed rate term is about to end, giving them the chance to move their money to an alternative account. Usually customers are notified at least 30 days before an account matures.

How long should savers fix for?

The highest interest rates tend to be available on accounts with the longest terms. For example, you can earn 4.75 per cent with ICICI Bank's five-year Fixed Rate HiSave Account. But many people will be uncomfortable locking their money away for five years.

Also, with the Bank of England base rate being at a record low, the next move in interest rates will be upwards. While 4.75 per cent may look attractive at the moment, it could become uncompetitive.

As a result, many savers are opting for shorter-term fixed rate accounts.

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