What is a Fixed Rate Bond?

A fixed rate bond is a short, medium or long-term savings plan that pays a fixed rate of interest over a specified period. The fixed rate and saving period are agreed upon prior to paying your deposit, with any returns added up and paid at the plans maturity. There’s a lot to know when deciding what to do with your money which is why we’ve created an expert guide to answer any questions you may have about fixed rate bonds.

While other savings plans allow multiple deposits over time, a fixed rate bond is a single lump sum deposit. To open a fixed rate bond you must be; aged 18+ and a resident in the United Kingdom. During the agreed savings period no withdrawals can be made. Then at the end of the agreed savings period you will receive your initial deposit as well as any accrued interest.

Fixed Rate Bonds explained

If you’re new to saving, before you take out a plan there can be a lot of terminology to wrap your head around when saving for long-term goals. These include:

• Term – The term is the length of time a fixed rate bond is issued for. It also represents the period the bondholder will receive interest payments. Depending on the provider, terms can vary from a few months to several years.
• Maturity – Maturity is the date when the bond expires or reaches the end of its term. At maturity, the bondholder receives their initial deposit back from their provider as well as any interest accrued.
• Interest Rates – The interest rate on a fixed rate bond is the fixed percentage that your deposit will accrue annually, semi-annually or monthly. This interest rate remains constant throughout the bond’s term, regardless of any changes in the market rates.
• Accrued Interest – This is the amount of interest you will earn on top of your initial deposit once it has reached maturity.

What is the difference between a Fixed Rate Bond and an ISA?

There are key differences between a fixed rate bond and an ISA, including how it’s taxed, the amount you can initially deposit, the term length, the interest rate and the level of risk. 

• Tax – ISAs are tax-exempt savings plans, while fixed rate bonds are subject to income tax.
• Initial deposit – With a fixed rate bond you can only make one lump deposit, with the amount you can save depending on the provider. On the other hand, you can invest monthly or with a lump sum into most ISAs and have the ability to increase or decrease the amount you invest and the amount of investments, as long as they’re within your annual ISA allowance.
• Term length – The term length for a fixed rate bond is predetermined before you take out the plan and can range between a few months and more than five years until the plan matures. There isn’t usually a locked term for an ISA and you can choose to invest for as long as you’d like. However, some cash ISA providers do offer fixed terms, so this is something that you should consider in your research.
• Interest rate – With a fixed rate bond you will know the level of interest you’ll earn prior to taking out the plan. While this is also the case for a Cash ISA they can also have a variable interest rate depending on the provider. However, with a Stocks and Shares ISA there is no advertised interest rate as any growth is based on the value of shares which can increase and decrease depending on changes in the market.
• Level of risk – Fixed rate bonds can be considered a safe savings plan, as you’re guaranteed to receive your initial deposit back as well as any accrued interest. The level of risk for an ISA depends on the type. A Cash ISA will have a low level of risk as you’re guaranteed to get back at least what you’ve put in. A stocks and shares ISA on the other hand is not free of risk as your investment can increase or decrease depending on market performance. It’s therefore recommended to invest in a stocks and shares ISA over the medium to long-term of at least 5 years as this gives your investment more time to grow and to recover from periods when investment conditions aren’t as strong.

What different types of Fixed Rate Bonds are there?

Fixed rate bonds will differ from provider to provider, which is why it’s important to think about what you want to get out of your deposit. Generally speaking the longer the term, the larger the interest rate that will be on offer as you’re locking your money away for longer. However, this isn’t always the case as it depends on what’s being offered by providers in the market at that time. E.g. If interest rates are high some bond providers may only offer higher rates for shorter terms if it’s likely that interest rates will start falling. Also, different bond providers can offer different interest rates, so it’s important to compare them to make the most of your deposit. Furthermore, depending on the amount you want to save, it’s worth checking if there are any minimum or maximum deposit requirements. For more information, take a look at our guide on “what is a savings bond”.

Combining different Fixed Rate Bonds

While other savings plans can allow you to make monthly direct debits, you can usually only make an initial payment into a fixed rate bond. Typically, you won’t be able to make any additional contributions once you have deposited your initial amount, however, you can open additional fixed rate bond plans as long as you do not exceed the provider’s maximum amount. This would allow you to make the most of a different provider’s interest rate, if you notice a higher allowance once you’ve already taken out a plan.

How are Fixed Rate Bonds taxed?

Fixed rate bonds are subject to the personal savings allowance. Meaning if you earn anything over £1,000 in interest you would be taxed at a rate of 20%. However, if you are a higher rate taxpayer your personal savings allowance will be lower, meaning you will be taxed at 40% once your accrued interest is over £500. If you are an additional rate taxpayer, you won’t get a personal savings allowance. For more information visit the government’s guide.

How secure are Fixed Rate Bonds?

A fixed rate bond is a relatively safe savings plan as you’re guaranteed to receive at least what you’ve deposited back, plus any accrued interest. The only risks in a fixed rate bond are cash based, meaning that at the end of your savings period, you may find that your savings haven’t kept up with inflation. Also, interest rates can change, and you may find a higher interest rate compared to the plan you took out.

You can open a Shepherds Friendly 5 Year Fixed Rate Bond from £1,000 up to £125,000 at a fixed rate of 4.75% AER. With our Fixed Rate Bond, you can rest easy knowing that your money is growing, which lets you plan for your years ahead with certainty.

Be sure to read through our Important Information Guide for all the key information about our 5 Year Fixed Rate Bond.