What is a fixed rate bond?

A fixed rate bond is a savings account that offers a fixed rate of interest for its full term. They are also commonly known as fixed bonds and fixed rate savings accounts.

Most fixed rate bonds don’t let you access your money until the end of the term, which is when the bond reaches maturity. Because the rate and term are fixed,  you’ll know precisely how much interest you’ll earn when you open your account.

You could earn a competitive interest rate on your spare cash by depositing it in a fixed rate bond, as they typically offer a higher interest rate than an easy access savings account.

But since many fixed rate bonds do not allow withdrawals, this way of saving comes with some risk. You'll be locking your money away for the entire term. So, you should consider whether this method of long-term saving is the best option for you.

In this guide on fixed rate bonds explained, we’ll cover how fixed rate bonds work, how safe they are, and whether you have to pay tax on the interest you earn.

Fixed rate bonds give you a guaranteed interest rate on your deposited funds. This means you’ll know exactly how much interest you’ll accumulate.

Our fixed rate bonds have a fixed term, so you can only withdraw your money at the end of the term — also known as maturity.

Typically, the longer the term, the more competitive the interest rate. So, it’s essential you consider whether the length is right for you because you won’t be able to withdraw any funds before this time passes.

As long as your provider is covered by the Financial Services Compensation Scheme, your funds are guaranteed to be secure for up to £85,000. All Shawbrook fixed rate bonds are eligible for FSCS protection.

However, locking your money away for a set period can be a risk if your financial circumstances change during the term. If you’ll need access to your money before the end of a fixed term, a different type of savings account could be a more suitable option, such as an easy access account.

A fixed term deposit is the money that you use to fund a fixed rate bond.

Most fixed term accounts will not allow you to add additional funds once you have opened an account. So, any investment that you want to make in that particular account needs to be made within your initial deposit.

When the fixed term of your bond ends, you can reinvest your money or withdraw your savings.

At Shawbrook, we’ll write to you a few weeks before your bond reaches maturity to remind you. At maturity, you can either withdraw your funds or transfer them into a new account with us (subject to account terms and conditions).

If you don’t notify us about what you wish to do with your funds by the maturity date, your account will revert to a matured funds account and we will confirm the interest rate in writing to you.

If your fixed term ends on a non-working day, your money will be made available on the next working day.

The interest earned on our fixed rate bonds are calculated as gross, so the interest rate is paid before taxes are deducted.

You will need to declare any interest as part of your annual tax return. If the interest you earn from our fixed rate bonds exceeds your Personal Savings Allowance, then it will be taxable. You may be able to earn interest from a fixed rate bond without paying tax depending on your Income Tax band. You can find out more information about tax on your savings interest on GOV.UK.

There are many benefits for choosing a fixed rate bond, including:

• A guaranteed interest rate for the entire term of the bond
• You may be offered a competitive rate if you can commit to investing your money for a set period
• You can choose the best term for your needs, such as 1 year, 2 year or a 7 year fixed rate bond
• Peace of mind that your money is protected from theft and set aside for the future
• Your funds are covered for up to £85,000 by the Financial Services Compensation Scheme (more on this below)

It’s also important to consider the disadvantages of a fixed rate bond. For example, you will lose access to your money for the length of the term. Before you open a fixed rate bond, evaluate your financial circumstances carefully. Make sure you can commit to putting your money away for a set period.

You are also bound to the bond’s interest rate, even if interest rates rise before the end of your term. So, think carefully about whether fixed rate bonds are a good investment for you.

You can hold more than one fixed rate bond.

It could be beneficial to consider splitting your savings across multiple bonds with different terms. This can provide flexibility because you can commit to short and longer fixed terms. You’ll have access to some funds sooner than others while still benefiting from competitive interest rates.

All eligible deposits into Shawbrook’s fixed rate bonds are protected up to a total of £85,000 by the Financial Services Compensation Scheme. For more information, please visit www.fscs.org.uk.