Five Questions About: Fixed-rate bonds

Why consider a fixed-rate bond?

The Bank of England froze base rate at 0.5 per cent again in August, marking two years and five months of paltry returns for savers. But at least the fixed-rate bond market is heating up with Santander, Chelsea Building Society and the Post Office launching offerings.

How do fixed-rate bonds work?

They promise to pay a set rate of interest for between one and five years. Rates are higher than those paid on other savings accounts as you forfeit access to your cash for the term. If access is permitted, it will result in a penalty that would wipe out the benefit of higher returns. Savers can have interest paid monthly or annually, while some accounts also offer a quarterly option.

What are the best fixed-rate bonds?

The best one-year bond pays 3.5 per cent AER from Hanley Economic Building Society. The highest-paying three-year account pays 4.25 per cent AER from United National Bank.

Savers can get a fixed rate of 5 per cent AER for five years with Leeds Building Society.

What are the benefits?

For savers with a lump sum, fixed-rate bonds will pay the highest guaranteed return. They are also suited to people who like the discipline of having their savings locked out of reach.

What are the downsides?

With interest rates still languishing at historic lows, savers run the risk of fixing in their returns at the bottom of the market. In this case, it could be sensible to opt for a shorter-term fixed rate bond, so you are free to move your cash if and when interest rates start to climb. You should also be sure you can afford to lock your savings away.