Fixed Term Savings Accounts - or Fixed Length Bonds

 
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Compare variable rate fixed term savings accounts, or bonds

 
The fixed tern bond offered by banks and building societies to savers can best be thought of as a savings account of fixed term, normally between around 3 months and 10 years. The bank or building society will specify this term when launching the bond.
 

Such bonds may appear without fanfare, and when they have attracted enough deposits the bond will normally be withdrawn without warning. Another may then appear offering a different rate of interest.
 

Not every bank or building society will be offering them at any moment, and the term of those on offer may vary from week to week. The rate offered by different institutions may vary to reflect their credit rating, and their need for funds at that time.
 

As a savings account a fixed bond:

  • Often offers a rate of interest that is fixed for the whole period of the investment when the account is opened, and will not change during the life of the savings account

  • Normally offers the saver the option of receiving interest paid monthly or annually; although some bonds may not offer a choice.

  • May not permit withdrawal of any money, other than interest during its life. Where permitted a penalty of maybe 6 months interest may be charged for early withdrawal. One or two buildings societies, for example the Leeds, sometimes allow a proportion up to 25% to be withdrawn without penalty.

  • Is part of the FSA's Financial Services Compensation Scheme - offering 50,000 per person per bank/building society.

Fixed term bonds may be attractive if:

  • The money invested will not be needed for a predictable period

  • It is desired to avoid continuing attention to the money, during the life of the bond

  • The saver anticipates interest rates may fall and the rate is fixed

  • The premium paid by the bank or building society is enough to make the inflexibility of the investment worth accepting

Fixed life bonds will probably not be attractive if:

  • The money may be needed for other purposes during the life of the bond

  • Interest rates are expected to rise and the rate is fixed

  • There are concerns about the safety of the bank or building society

  • Higher rates may be attainable for similar risk from other investments

As well as the fixed rate bonds already mentioned, the saver should be aware of other types of fixed life bonds:

  • Tracker Bonds - where the term is fixed but the rate may track bank base (or other) rate

  • Variable Rate Bonds - where the term is fixed, but the rate can be changed by the bank or building society

  • Stepped Rate Bonds - typically of longer life, the rate changes over time in a prespecified way. For example the rate may be set at 4% for the first year rising to 5% in the third.

  • Inflation Linked Bonds - of fixed life which will track the Retail Prices Index (RPI) in some way

  • Investment Bonds - often linked to stock exchange performance, savers are advised very strongly to take advice before buying, as they can have very unwelcome side effects. For example so called 'precipice bonds' secured savers against small falls in the Stock Market, but not against large falls. This meant that in a stock market crash savers lost significant proportions of their investment, even though they had been led to believe that their capital was secured.

As always, you may wish to seek the advice of an independant financial advisor.

 

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