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What is a Fixed Rate Bond and how does it work?

If you have an amount of money available, that you don’t need for living expenses or emergencies, you may want to consider investing a lump sum in a Fixed Rate Bond.

A Fixed Rate Bond is a type of savings account that offers a fixed rate of interest for a set period of time. This guide will walk you through what a Fixed Rate Bond is and how it differs from others savings accounts.

What is a Fixed Rate Bond?

A Fixed Rate Bond, also known as a Fixed Term Deposit, is a savings account that you can put money in for a set period of time, usually 1, 2 or 3 years, but can also be as long as 5 years.

In exchange for agreeing to not withdraw your money during this term, you get a fixed rate of interest that is generally higher than what you would get from a savings account that allows regular withdrawals.

A Fixed Rate Bond may be suitable for those looking to invest a lump sum, or those looking for a mid to long term savings account.

As you agree to lock your money away for a fixed term, it is not suitable for those wanting access to their money, especially on a regular basis.

Keep in mind that it is usually recommended to have at least 3 months’ worth of monthly income in an instant or limited access savings account before you opt to lock your money away.

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How do Fixed Rate Bonds work?

Fixed Rate Bonds are available with different terms. In general, the longer the term, the higher the interest rate. Most Fixed Rate Bonds require a minimum deposit to open the account. Unlike many other savings accounts, you are usually only allowed to pay in once, which is when you open the account.

Providers of Fixed Rate Bonds may give you the option to have earned interest paid out either monthly or yearly.

What does ‘term’ mean?

With Fixed Rate Bonds, the ‘term’ is the amount of time you choose to lock your money away for, i.e. 1 year.

What does ‘maturity’ mean?

When your Fixed Rate Bond term ends, your money ‘matures’ and you get access to it. This is known as maturity.

Can the interest rate change?

No, the interest rate is fixed until your account matures.

What happens when the fixed term ends?

It depends on what provider your Fixed Rate Bond is with.

Here at the Co-operative Bank, on maturity of your Fixed Rate Bond, we transfer your money into an instant access account, so you can withdraw your money if you wish to, or reinvest into a different account, either with us or a different provider.

4-6 weeks before your Fixed Rate Bond reaches maturity, we will contact you to let you know of your options. These include re-investing in another Fixed Rate Bond, withdrawing your money or both.

Other providers may tie your money up in another Fixed Rate Bond on maturity if you don’t let them know that you want to withdraw, so it is important that you read the maturity information before opening the bond, not just at maturity.

Are there Fixed Rate Bonds for children?

Yes, some providers offer children’s Fixed Rate Bonds, and some adult Fixed Rate Bonds do not have a minimum age requirement.

A Fixed Rate Bond can also be opened as a ‘Re: Account’. This is a Fixed Rate Bond that has been applied for on someone else’s behalf, and is usually for people who don’t have their own current accounts yet.

As children have the same income tax allowance as adults, the interest earned in a child’s name is also liable to tax. You can find more information about interest on savings for children on the gov.uk website.

Here at the Co-operative Bank, you can open a Fixed Rate Bond if you are a UK resident and have a minimum of £1,000 to deposit.

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Can I have more than one Fixed Rate Bond?

Yes, you can have more than one Fixed Rate Bond. One way to manage multiple Fixed Rate Bonds, is to split money between accounts with different terms.

Table visualising how multple Fixed Rate Bonds can be managed through 'laddering'

This way, you would always have money maturing whilst maximising the higher return that often comes with longer terms.

You have to make sure, however, that you don’t need to access your money before the end of the term.

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Do I have to pay tax on Fixed Rate Bonds?

Yes, the interest earned on Fixed Rate Bonds is taxable, however, most people can earn some interest on their savings without paying tax*.

Depending on what Income Tax band you’re in, you may get up to £1,000 of tax-free interest. Learn more about tax on savings interest by visiting the gov.uk website.

Fixed Rate Bonds are available as tax-free savings accounts if you go for a Fixed Rate ISA. A Fixed Rate ISA operates in exactly the same way as any other Fixed Rate Bond, except the interest that you earn is free of income tax.

*Any reference to tax is based on our understanding of current tax regulations which may change in the future and depends on your individual financial circumstances.

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Can I lose money on a Fixed Rate Bond?

No, as long as you don’t withdraw your money until maturity, you’ll get all your money back plus the interest you’ve earned.

Some providers do allow withdrawals, but often with a heavy penalty such as a reduced interest rate or a charge.

Always make sure that you have enough money in other accounts, such as instant or limited access savings accounts, to cover you for any emergencies. This is because you may not be allowed to withdraw from your Fixed Rate Bond until the end of the term.

If you are forced to pay a charge for the withdrawal, it could mean you may get back less than what you put in.

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Can I open a Fixed Rate Bond as a joint account?

Yes, you can usually open a Fixed Rate Bond as a joint account. This also means that the interest earned is split between the two account holders.

Can a Power of Attorney open a Fixed Rate Bond?

Yes, in these cases the interest earned from the Fixed Rate Bond is earned and owned by the account holder, not the Power of Attorney.

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Important things to remember

  • Do not opt for a Fixed Rate Bond if there’s any chance that you’ll need your money during the account term. Always read the small print carefully.
  • For our Fixed Rate Bond you will need a minimum of £1,000 to open the account. Other providers may require a different deposit.
  • You have to make sure that you will not need access to your money until the end of the term.
  • Withdrawing money before the end of the term is not allowed with us and can be costly with other providers as penalty charges or a reduced interest rate may apply.
  • If you need frequent access to your savings, an instant access or a limited access savings account may be a more suitable option for you.

See our savings accounts