A fixed rate bond is a type of savings account that holds your money for a set period of time, known as the term. You're then paid a fixed interest rate on the amount you have in the bond for the duration of the term.

Fixed rate bonds sometimes pay a higher interest rate compared with savings accounts that give you easier access to your money. This is because you won't be able to take cash out or add more money during the fixed term.

A fixed rate bond is a good option for those who already have a lump sum of money, but will only need to access the money in the next few years.

Fixed rate bonds work by locking your money away for a set term, during which you earn a fixed rate of interest.

The terms on fixed rate bonds can vary from three months to seven years.

However, unlike ordinary savings accounts, most bonds don't let you add money little by little, you need to deposit all the money you want to invest in a lump sum.

A fixed rate savings account offers a guaranteed interest rate for a fixed period, here are some of its key features:

• Fixed interest rate - the interest rate is locked in for the full term, so it won't change. This gives certainty about how much you'll earn and protects against falling interest rates in the market.

• Fixed term length - the term length can vary from three months to seven years, so it's best to choose the account that aligns with your savings goals.

• Lump sum deposit - with this type of savings account you normally have to deposit an amount of money when you open the account. So there should be a minimum opening balance.

• Limited or no withdrawals - most fixed rate bonds do not offer withdrawals until the end of the term. If early access is allowed then this will come with penalties or reduced interest.

There are some savings accounts that don't offer interest as an annual equivalent rate (AER), and instead you'll be given an expected profit rate (EPR). This is normally found within Islamic banking and it's important to understand the difference, as this type of savings account is growing in the UK.

So why is it EPR rather than AER? Well, Sharia Banking doesn't allow interest to be earned on its savings accounts. This is strictly forbidden in Islam, so instead you will be paid a profit from what is made during the year. To get this profit, your money is invested in ethical, Sharia compliant trading activities.

To understand how much you can earn, you can compare the EPR percentage with the interest rate offered from traditional banks. However, the EPR rate is not guaranteed, but you should get notice before it's changed.

When the term ends, the bond is said to have matured. Typically, your bank or building society will contact you long before the bond reaches maturity. They will ask what you want to do with your money when the term ends and give you some options to consider.

In most cases, your provider will give you a selection of options to choose from. These could include:

• Reinvesting the money in a new bond

• Setting up a new bond with your existing funds and adding an additional amount

• Reinvesting a proportion of the bond and withdrawing the rest

• Closing your account and withdrawing all your savings

If your fixed rate bond has matured and you've chosen to cash in your money, follow these three steps.

1. Go online or phone your bank or building society to close the account. In some cases, you may have to do this in person at a branch

2. Wait while your bank transfers the money into your account

3. Decide what you want to do with your money

If you decide on reinvesting your money, it's a good idea to compare the latest rates on offer for a new fixed rate bond, or consider other types of savings accounts or investing products.

You could also speak to a financial adviser for further guidance on what to do.

With a fixed rate bond you’re locking away your money at a fixed rate for a set period. So there is a chance that interest rates may rise during that term and you may not earn the best rate possible over the full term of the deal.

At the same time, your original investment may not hold its value in real terms if the interest you’re getting is less than the rate of inflation over your savings period.

The resulting impact of those circumstances may affect your eventual return on investment, but it isn’t nearly as significant as losing the entirety of your savings.

The latter scenario is also highly unlikely as fixed rate bonds are protected under the Financial Services Compensation Scheme (FSCS) up to a maximum of {{fscs-amount-money}}.

If you plan on saving more than that, it's best to split any amount over {{fscs-amount-money}} with another bank or provider. Just be sure that the new bank or provider doesn't operate under the same banking licence as your other accounts.

What are the alternatives to fixed rate bonds?

FAQs