Savings bonds should be considered alongside other forms of savings, such as standard savings accounts, but how do you know if a savings bond is an option for you? We explore what you need to consider when deciding if a savings bond is right for you.
Typically, savings bonds are fixed rate bonds, but variable rates are also available. With a fixed rate bond, you receive a guaranteed, set amount of interest throughout the lifetime of the bond. Given that the Bank of England base rate of interest is just 0.1% at the moment, it’s easy to see how a standard savings account doesn’t fare too well for a saver in monetary terms.
In short, a savings bond is a product whereby money is being borrowed from you. In return, you get interest paid to you, which is added to your savings either annually, or when the bond matures, and your money remains within the bond until the maturity date.
In this regard, they differ from a savings account where the money is easily accessible and is still within your control. With a fixed rate bond, your money is deposited and saved for a set time period during which you cannot withdraw it under normal circumstances. A savings account on the other hand is open-ended, so you keep adding and taking money out as you wish.
The advantages of savings bonds
The advantages of savings bonds are wide reaching. Here we explain the main ones:
- You can expect higher rates of interest: The most significant advantage that fixed term savings bonds have over regular savings accounts is that they usually pay higher rates of interest. A fixed term savings bond will often pay above the Bank of England base rate.
- Stability: Particularly applicable to fixed rate savings bonds is the advantage of stability. You can open a fixed rate savings bond today and know exactly what the guaranteed interest rate will be at the end of the term. That same stability may not apply to regular savings accounts, even cash ISAs, where the rates of interest could vary over time.
- Security on large sums: It’s important that you choose a provider where your money is protected. Check to see if your provider is covered by the Financial Service Compensation Scheme (FSCS) and how much of your investment is covered. At Shepherds Friendly, the FSCS will protect 100% of your investment, so you will have protection on the full amount saved, up to the maximum £125,000. The standard FSCS protection for savings from banks, building societies and credit unions is £85,000 but protection is unlimited for insurance contracts. Our plans include an insurance element which is why 100% of your investment is protected.
- You can withstand temptation: Money sat in a regular savings account can be tantalising, enticing you to go on that holiday, do those home improvements, or whatever it may be. If the money is physically tied up in a savings bond and you can’t access it, then that’s no longer a choice. Taking the money out of a bond is unlikely to be possible except in exceptional circumstances such as diagnosis of a terminal illness, or bankruptcy.
Things you need to consider before opening a savings bond
Whilst savings bonds bring many advantages, you also need to be aware of the restrictions.
- Inflexibility: When you put money into a savings bond, you are doing so for a set period, usually between six months and upwards of seven years. If you wish to withdraw your money before this time is up then you will likely incur penalties. Therefore, you need to be reasonably sure that you will not need that money until after the end of the fixed term. This may also pose a problem if you see another savings product that pays more interest which you would rather use instead. You need to be content to live without that money, or have it available for other investments, for the duration of the fixed term.
- Not all savings bonds are regulated: When you choose a savings bond, you need to ensure you choose a reputable provider, that is regulated by the Financial Conduct Authority and is covered under the FSCS. Not all savings bonds are offered by regulated financial organisations and saving with a company that doesn’t offer protection for your money could place your money at risk.
- Tax can be confusing: Generally, with the exception of products such as ISAs, the interest you make on savings is taxable. HMRC calculates the tax due on savings bonds at the point of withdrawal. This means you’ll need to do some calculations to see what your tax implications may be at the end of the fixed term. At Shepherds Friendly, there will be no capital gains tax or basic income tax as the With-Profits that our 5 Year Fixed Rate Bond is invested within will have already paid tax for this plan.
- Bank of England interest rates could rise: Bank of England interest rates can go up as well as down, meaning more competitive rates could be put on the market in the future. If you save your money in a fixed rate bond, you would have to stick with the interest rate you have got and not switch to a new bond.