Five Questions About: Fixed-rate bonds

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The Independent Online

What are they?

Fixed-rate bonds are savings accounts that offer a fixed interest rate for a specific term, usually between one and five years. They often offer higher interest rates than easy-access accounts, but you generally cannot make withdrawals or close the account early.

Why have they been so popular in recent years?

The Bank of England base rate has been at 0.5 per cent for more than two and a half years, leaving savers struggling to earn decent rates of return. As fixed-rate bonds provide some of the highest savings rates, and these rates are guaranteed for the term of the account, they are appealing.

Are they a good option?

Since the base rate has been so low, many savvy savers who invested in fixed-rate bonds when the rate tumbled will be seeing their bonds reach maturity. The good news for those whose two- and three-year bonds are coming up to term is that the rates on offer are more competitive than they were a year ago. With signs indicating that the base rate will remain low, locking money away for a year could prove wise.

Are there any risks?

While no one is expecting the base rate to shoot up soon, there is no guarantee that it will remain this low. Longer-term fixed-rate bonds should be approached cautiously as while rates look competitive now, they may start to look less so when interest rates rise. Also, some providers will enrol you in another bond – tying your savings up for the term – or put your cash in a low-rate account if you fail to move your savings when your bond matures.

What are the best fixed-rate bonds available?

Over one year you can earn 3.4 per cent with Tesco Bank, if you have at least £2,000 to invest. If you prefer to invest for two years, NatWest is offering 3.75 per cent on between £25,000 and £500,000 and Tesco Bank is paying 3.6 per cent on £2,000 or more.

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