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If you’re wondering, ‘What is a fixed-rate bond’, we’re here to help explain. A fixed-rate bond is a type of savings account where you deposit a lump sum of money for a ‘fixed’ term. During this period, the interest rate remains the same, protecting your savings from potential market drops. However, it also means you won’t benefit from any interest rate increases that a variable-rate account may receive.
In this article, we’ll explain how fixed-rate bonds work, outline the tax considerations, and explore the key benefits of fixed-rate bonds, helping you decide whether they’re the right choice for your savings.
When you put your savings into a fixed-rate bond, you will pay a lump sum at the start of the term which you can’t withdraw until the end of the fixed term. Because the accounts are fixed, the interest rate also cannot change during the fixed term. At maturity, your account will automatically become an Easy Access account, where you can then choose to withdraw or reinvest your money.
When understanding ‘are fixed-rate bonds safe? ‘ There are a few things to consider before choosing to invest your money.
- Financial Services Compensation Scheme (FSCS) Protection: Make sure you invest in a fixed-rate bond that is protected by FSCS. Eligible deposits with Hinckley and Rugby Society are protected up to a total of £120,000 by the FSCS.
- Access Restrictions: You won’t be able to make withdrawals until the end of the fixed term, so it’s important to be comfortable locking your money away for the full duration of your chosen account term. We recommend keeping some savings easily accessible in case unexpected expenses arise.
- Market risk: While you benefit from the certainty of a fixed interest rate for the duration of the term, market rates may rise. If they do, you could miss out on higher savings rates while your money is locked away.
You may need might pay tax on the interest earned from a fixed-rate bond. The amount you pay will depend on various factors, including your personal savings allowance, how much money you have in savings and when you access your interest.
- Personal Savings Allowance (PSA): Most people can earn a certain amount of interest without having to pay any tax. If you are a basic rate taxpayer, you can earn up to £1000 of interest tax-free. If you are a higher-rate taxpayer, that limit drops to £500. If you are an additional rate taxpayer, you cannot earn any interest without paying tax.
- Multiple accounts: This limit applies to the total interest you earn across all your savings accounts with us as well as with other financial providers.
- Timing of Access: The interest earned from the fixed-rate bond is counted in the tax year you are able to access it.
If you are worried about the thought of having to pay tax on your savings, consider looking into maximising your annual £20,000 ISA allowance because interest earned on a cash ISA is completely tax-free and doesn’t impact your PSA.
If you need to pay tax on the interest earned from your fixed-rate bond, the point at which you pay tax depends on when you can access that interest.
Assuming you open our 5-year fixed-rate bond, you can choose to have your interest added back into the account. If you select this option, you will not have access to the interest during the fixed term. In this scenario, any tax due would be payable in the tax year in which the account matures and the interest becomes accessible to you.
Alternatively, you can choose to have your interest paid to an external account. In this case, you will have access to the interest each year when it is paid on 1 December. As a result, any tax due would be payable in the relevant tax year for the interest received.
For more detailed information about tax on savings interest, visit https://www.gov.uk/apply-tax-free-interest-on-savings or call HMRC on 0300 200 3300
As with all savings accounts, there are both benefits and limitations to each account. Here is a summary:
| Benefits | Things to consider |
| Guaranteed Returns: Your interest rate is locked in and won’t drop, even if the Bank of England lowers rates. | No Access to Funds: You cannot make withdrawals until the end of the term. |
| Higher Rates: They usually offer higher interest rates compared to more accessible savings accounts. | Missed Opportunities: If the savings market changes and interest rates rise during your fixed-rate term, you may miss out on higher rates elsewhere, as your rate will remain fixed for the duration of the term. |
| Safe & Secure: Perfect for lump-sum savings you know you won’t need to touch for a set period. | Inflation Risk: If inflation is high, the real purchasing power of your cash might decrease over time. |
Fixed-rate bonds could be a good choice for those with a lump sum of money that they can comfortably put aside for a fixed period in exchange for a guaranteed rate of interest. They may be particularly suitable for:
People seeking certainty
If you want to know exactly how much interest your savings will earn over a set period, a fixed-rate bond provides a guaranteed rate for the duration of the term.
People who do not need immediate access to their savings
Fixed-rate bonds are designed for money that can be left untouched until the end of the term. In return for restricted access, they often offer higher rates than easy-access savings accounts.
People planning for a future goal
Whether you are saving for retirement, a substantial future purchase, or to support family members in the future, a fixed-rate bond can help you set money aside while benefiting from a guaranteed return.
Here is a summary of our fixed-rate bond accounts:
| 5 Year Fixed Rate Bond – Issue 41 | Fixed Rate Bond Until 31 Oct 2028 (2) | 1 Year Fixed Rate Bond – Issue 1 | |
| Interest Rate | 4.65% Gross / AER | 4.55% Gross / AER | 4.41% Gross / AER |
| Fixed / Variable | Fixed | Fixed | Fixed |
| Minimum Balance | £1000 | £1000 | £1000 |
| Withdrawals | Not until the end of term | Not until the end of term | Not until the end of term |
| Interest Paid | Annually | Annually | Annually |
If you’re still wondering, ‘What is a fixed-rate bond?’ ‘Do you pay tax on fixed-rate bonds?’ Or ‘Are fixed-rate bonds safe?’ Our friendly team at Hinckley and Rugby Building Society is here to help. Get in touch, and we can help you find an account that suits your savings goals and keep your money working hard.
