1 year fixed rate bonds

If you have a lump sum of money that you can afford to lock away for a year, you may find that you can get a higher interest rate through a 12 month fixed rate bond (also known as a fixed term deposit), than you would typically get with an ISA or easy access account. What's more, you'll know exactly how much you'll earn when the product matures, as the interest rate is fixed.

A 1 year fixed rate bond is a savings account you can open with a single deposit, and earn a fixed interest rate for one year. No matter what happens to the Bank of England base rate or interest rates generally, the rate will stay the same for 12 months.

You can also apply for fixed rate bonds with different terms, including six month, two year, three year and five year fixed rate bonds.

You may hear fixed rate bonds referred to as fixed term deposits, fixed rate savings, savings bonds or fixed rate savings accounts; these terms all refer to the same type of savings account.

You open a fixed rate savings account by depositing a single lump sum that is locked in for the duration of your term, meaning you can’t access your money until your product matures.

The amount of interest you could earn from a fixed rate bond is advertised as an annual equivalent rate (AER), and how much you earn depends on a few things:

1. How long your fixed rate lasts for; 12 months in this case.

2. How much you deposit.

3. The annual equivalent rate (AER).

4. How the bank pays out in interest.

Most 12 month fixed rate bonds have a minimum cash deposit amount, generally between £500 and £1,000. There’s usually also a maximum deposit amount, which for some banking groups can go as high as £2,000,000. However, it’s important to keep in mind that deposit protection schemes such as the Financial Services Compensation Scheme (FSCS) only protect deposits into savings accounts up to £85,000 per person, per banking group. At Raisin UK, we only allow you to open a savings account with an amount that’s within the applicable deposit protection limit.

If you’re a basic rate taxpayer, the personal savings allowance means you can earn interest of up to £1,000 per year without having to pay tax on that interest. For higher-rate taxpayers, that’s reduced to £500 per year. Interest on your 1 year savings bond is typically paid out on maturity, i.e. at the end of your one year term, meaning you won’t have access to your interest until your maturity date.

Finally, there’s no limit to how many fixed term savings accounts you can open. Bear in mind, however, that the FSCS treats different banks who are part of the same banking group as one bank, so the compensation limit applies to the total amount you have in all accounts within the group. This means any savings exceeding £85,000 won’t be protected under the FSCS scheme if the bank fails.

With a fixed rate bond, the idea is you leave your money untouched for the duration of the term, be it 1 year or another set period. Some banks will let you withdraw your money early, but you’ll have to pay a penalty for the privilege, which could negate any return you may have received. If there’s a chance you’ll need to withdraw your money from your fixed rate bond before the end of the term, you might want to consider opting for a notice account or easy access account instead.

When you open a 1 year fixed rate bond, the interest rate will remain the same for the duration of the term (in this case, 12 months). This means your interest rate won’t be affected by any changes to the Bank of England base rate. Generally speaking, the longer you’re prepared to lock away your money, the higher the interest rate is likely to be. This can make it favourable when interest rates are predicted to begin dropping.

12 month fixed rate bonds are short-term investments that generally offer better returns than ISAs. They don’t offer the same rates as bonds with longer terms, but are a good choice for those who don’t want to lock their money away for a long time.

Are other fixed terms available?

Yes, at Raisin UK, there are plenty of terms to choose from, including:

• 6 month fixed rate bonds
• 9 month fixed rate bonds
• 2 year fixed rate bonds
• 3 year fixed rate bonds
• 5 year fixed rate bonds

If you’re looking to really maximise your money, you could apply for different lengths of fixed rate savings bonds to benefit from the interest and proceeds of each one. An example of this is demonstrated in the table below: 

One year fixed rate accounts can be very beneficial, especially if you’re in a position to deposit a lump sum that you don’t need to access for 12 months:

• Your interest rate is fixed for one year;

• You are certain of the interest you’ll earn;

• You know how long your savings period lasts for;

• You can protect your savings from interest rate changes; and

• Accounts are typically free to open (they are at Raisin UK).

A one year fixed rate bond will typically give you a more competitive rate of return than most other savings accounts, such as notice accounts or easy access accounts. To find the best 12 month fixed rate bond for you, you should compare bonds from different providers.

At Raisin UK, we provide an easy-to-use comparison table that lets you browse one year fixed rate bonds from all of our partner banks and building societies.

It’s understandable that you may be hesitant about opening a 1 year fixed rate bond with a bank you’re unfamiliar with. However, as we’ve shown above, you can often secure a much more competitive interest rate if you look beyond well-known high street banks.

Although not household names, many newer and smaller banks actually offer some of the best returns on your cash. And provided they’re covered under the Financial Services Compensation Scheme (or European equivalent), up to £85,000 of your money is protected in the event the bank fails.

At Raisin UK, we only allow you to open a savings account with a lump sum that’s within the applicable deposit protection limit, giving you peace of mind that your money is safe. You can learn more about our partner banks here.

Finding the best 12 month fixed rate bond for you ultimately depends on your savings goals, and how much money you’re able to lock away. Before deciding which fixed rate bond to open, consider the following questions:

• How long can I afford to lock away my money? Most fixed rate bonds only allow you to access your money at the end of your fixed term. Make sure you’ve worked through your budget plan.
• Is the interest rate going to give me what I want? One of the advantages of fixed bonds is that you can calculate the amount of interest you’ll earn, and whether you’ll hit your savings target before you even open the account.
• Do I have enough money to open a fixed rate bond? You need a lump sum to open a fixed rate bond, typically £1,000 or more, depending on the account you choose.
• Does the interest payment method work for me? Depending on the fixed rate bond you choose, your bank may pay interest monthly or in a lump sum at the end of your fixed term.

When you reach the end of your 1 year term, you have a couple of choices. You can either withdraw your original lump sum and any interest you’ve earned and close the account, or you can move your savings to another account.

At Raisin UK, you can renew your fixed rate bond either with your original deposit and the interest you’ve earned, or you can withdraw your interest and renew with your original deposit amount only.

If you take out a 1 year fixed rate bond, you can only keep it for 12 months. You can, however, choose to renew your bond by simply logging in to your Raisin UK account between 28 and 5 days before your bond is due to mature. You’ll then be able to view a selection of renewal offers, although bear in mind that these may be at a different rate from your previous bond (this option will only appear if your partner bank is offering a renewal option).

As your bond nears its ‘maturity’ date, or the end of the agreed term, you’ll receive a letter from your account provider asking you what you want to do with your money. Your options will usually include reinvesting the money into another fixed rate bond, transferring the funds to a nominated bank account, or cashing in your bonds by cheque. 

There will usually be a form for you to fill out to choose your preferred option. Once your account provider receives your form, it typically only takes a few days for you to receive your money.

Are there any alternatives to 1 year fixed rate bonds?

Good alternatives to one year fixed rate bonds will differ from person to person and your individual savings goals. However, if you’re looking for the same low-risk factor and a guaranteed return on your savings, you might want to consider notice accounts or easy access accounts.

Can I lose money on a 1 year fixed rate bond?

Providing your financial institution is protected by the FSCS, up to £85,000 of your money is protected in the event of their failure. Fixed rate bonds also provide little to no risk in the sense that you will always get your money, and a little bit extra, back when they mature.

Do I pay tax on 1 year fixed rate bonds?

The interest earned on one year fixed rate bonds will be taxable, but only when it exceeds your personal savings allowance. For basic rate taxpayers, this amount is £1,000, while higher rate taxpayers have an allowance of £500.

Can I add more money into a 1 year fixed rate bond?

The majority of 12 month fixed rate bonds only allow you to deposit money when you open your account. For accounts that you can top up, you might want to consider other types of savings accounts that allow you to pay money into regularly.

Can I withdraw money early from a 1 year fixed rate bond?

You may be able to find a fixed rate bond that will allow you to withdraw money early, but this isn’t typical, and you will usually be charged a fee.

How do I pay money into my 1 year fixed rate bond?

You will pay money into your one year fixed rate bond when you open it, in the form of a deposit. Most fixed rate bond accounts don’t allow you to add any more money, meaning a notice account or ISA might be a better option for you.

How many 1 year fixed rate bonds can I open?

There’s no limit to how many fixed rate bonds you can open, but it’s important to keep your personal savings allowance in mind, because you’ll need to declare any amount that goes over it. For investment purposes, it might also be better for you to open fixed rate bonds of different terms, as we explored in the table above.

Are 1 year fixed rate bonds protected by the FSCS?

Yes. Most financial institutions are part of the FSCS, but you can check that your institution offers the protection by searching for them on the FCA Register.