Ever wondered what a savings bond is, and how it differs from a regular savings account? Savings accounts and savings bonds do share many similarities, hence the confusion.
Savings Bonds are interest paying deposit products offered by financial services providers. A bond is money being borrowed from you. You get the benefit of interest being paid to you for that loan.
The differences between a savings bond and a regular savings account
A savings bond has some distinct features compared to a regular savings account:
Rates of interest: Many savings bonds are available with a fixed rate of interest so you’ll know exactly what your returns will be over the term. There are also savings bonds which have variable rates of interest which track the Bank of England base rate. This means that it could pay you more or less, according to base rates, over time.
Length of term: When you open a regular savings account, it tends to have an open-ended and indefinite term. In other words, you can keep the account ‘open’ as long as you like. Savings bonds on the other hand, have a set term. This means they run for a fixed amount of time varying from a few months to many years.
Binding: The word ‘bond’ applies because you are tied in to the fixed term and the set interest (or variable tracker). With regular savings accounts you aren’t typically tied in and can access your savings at any point. You may lose the interest, or indeed not be able to come out at all until the end of the term.
What happens at the end of the savings bond term?
When you reach the end of the bond’s term, you may need to act rather than just keep an account ‘open’.
You’ll have a few different options. Some providers allow you to transfer the money to what is called a ‘maturity savings account’, from which you can withdraw your savings. You may choose to have the money paid back in to the account you took the initial funds from in the first place. Alternatively, you may choose to reinvest the money back in to another savings bond.
Your provider should contact you at the end of the term to find out what you want to do, so you should receive contact from them before your savings bond matures.
Are bonds as safe as other savings?
Savings are generally considered to be on a scale of risk. Cash savings held with banks and building societies are generally considered lower risk than investments such as bonds, shares and funds. Because the risk is lower, cash savings typically offer lower potential returns than investments. Stocks and shares are investment products rather than savings accounts. Their value can rise and fall, meaning investors may get back less than they originally invested. There are different types of bonds, which carry different levels of risk. Generally, bonds are considered to be lower-risk investments than shares, although the level of risk will depend on the type of bond
Furthermore, some bonds are protected by the Financial Services Compensation Scheme, in just the same way as a savings account. Savings held with UK-authorised banks, building societies and credit unions are generally protected by the Financial Services Compensation Scheme (FSCS) up to £120,000 per eligible person, per authorised institution. Different rules may apply to insurance-based savings products. This means many are secure and may offer higher potential returns than a standard savings accounts.
For some saving bonds, you may be taxed on the interest you make in the same way you’re taxed on the interest in savings accounts.
Shepherds Friendly 5 Year Fixed Rate Bond
At Shepherds Friendly, we offer a 5 Year Fixed Rate Bond, which is a life assurance savings plan. To open a savings bond with us, you can invest between £1,000 and £125,000. In return, you’ll receive a guaranteed annual return for five years, with the interest rate fixed and confirmed when you open the bond.
All of our savings plans are covered by the Financial Services Compensation Scheme up to 100% of the amount you invest with us, should our Society suffer a complete financial failure.
If you have any queries about what savings product is right for you, speak to a financial adviser.
Please note: No advice has been given by Shepherds Friendly, and if you are in any doubt as to whether a investment plan is suited to your needs, then you should contact a financial adviser. There may be a charge for financial advice, and the cost should be confirmed to you before any advice is given.
