Fixed rate bonds vs ISAs

It’s important to choose the right type of savings account for you, and this will often depend on your savings goals, how you want to save and your financial position. When considering different types of savings accounts, you may find yourself asking, “should I open a bond or ISA?” 

On this page, you’ll learn more about what fixed rate bonds and ISAs are, understand the differences between them, and find out what to consider when opening fixed rate bonds or ISAs.

A fixed rate bond is a type of savings account that locks your money away at a fixed rate of interest for a set time, usually between six months and five years. Fixed rate savings accounts typically offer competitive interest rates that won’t change from the day you open the account until the end of your agreed term. This provides the certainty of a guaranteed return, which is especially reassuring in times of interest rate volatility. The interest you earn will depend on the amount you’re willing to deposit and the term you choose. In general, the longer you lock away your money in fixed rate bonds, the higher the interest you’ll receive at the end of the term.

ISAs, or individual savings accounts, are tax-free savings accounts. You can save up to £20,000 per tax year without paying tax and choose from different types of ISAs, such as cash ISAs, stocks and shares ISAs, innovative finance ISAs and lifetime ISAs. If you’re the parent or guardian of someone under the age of 18, you can also set up a junior ISA on their behalf.

The most common ISAs are cash ISAs, and there are three main types: 

• Instant access ISAs, which provide the flexibility to withdraw your savings without penalty

• Regular savings ISAs, which offer competitive interest rates over a certain period of time as long as you deposit a certain amount each month

• Fixed rate cash ISAs, which are similar to fixed rate bonds in that you commit to locking your money away for a certain period of time to earn a fixed interest rate

Historically, fixed rate cash ISAs have proven to be a better choice than an instant access ISA for those looking for a return on their investment. However, when comparing ISA vs fixed rate bond options, even these ISA accounts typically offer less competitive rates than other normal fixed savings accounts like fixed rate bonds.

Fixed rate bonds

• Fixed rate bonds typically offer more competitive interest rates 

• You can’t usually withdraw your money until the end of your fixed term

• Deposit a lump sum at the beginning of your term and watch your savings grow

• Deposit almost as much as you want, although the FSCS will only protect deposits to UK regulated banks up to £85,000 per person, per banking group 

• The fixed interest rate means you’ll know exactly how much you’ll earn by the end of your term

• Interest is taxable, although this may be irrelevant if you’re eligible for the personal savings allowance

ISAs

• ISAs give savers the flexibility of making withdrawals (although you may incur a fee, depending on the financial institution)

• The maximum you can save across all your ISAs combined is £20,000 per tax year (typically 6th April to 5th April)

• ISAs typically offer variable rates that aren’t as competitive as fixed rate bonds, but interest rates may increase towards the end of the tax year to encourage savers to deposit up to the maximum allowance before the tax year ends

• Any money you earn from an ISA will always be tax-free

Deciding whether to open a fixed rate bond or an ISA will depend on your savings goals. It may even be beneficial to open both types of savings accounts.

If you’ve already reached the ISA deposit limit of £20,000, or you want a guaranteed return on a lump sum that you can lock away until the end of a fixed term, a fixed rate bond might be best for you. However, if you think you may need to access your money, an ISA (or a notice account) might be better.

It’s also important to consider the tax implications when deciding whether to open a bond or ISA. One of the main benefits of ISAs is that they’re tax-free. While this may benefit some savers, the personal savings allowance (PSA) means most people don’t pay tax on their savings interest anyway.

If you don’t need the tax perks of an ISA and can afford to lock away a lump sum, it might make more sense to open a fixed rate bond. The top-paying bonds usually offer more competitive interest rates than most ISAs, giving you a better return on your investment in the long run.

However, if you have substantial savings and are likely to exceed your PSA (£1,000 for basic rate taxpayers and £500 for higher rate taxpayers), an ISA can still provide you with a tax-free way to save. Likewise, if you’re not eligible for the PSA because you’re an additional rate taxpayer, an ISA can help to minimise your tax liability.

Raisin UK offers the following fixed rate bonds:

6 Month Fixed Rate Bonds

1 Year Fixed Rate Bonds

2 Year Fixed Rate Bonds

3 Year Fixed Rate Bonds

5 Year Fixed Rate Bonds

Whether you choose a cash ISA or a fixed rate bond depends on your financial goals and preferences. If you are looking for flexibility and easy access to your savings, a cash ISA might be suitable. Alternatively, if you’re comfortable locking in your funds for a fixed period and seeking a potentially higher interest rate, a fixed rate bond might be best for you. As is the case when opening any type of savings account, it’s important to do your research and compare the market beforehand to find the best option for you.

Yes, you don’t always have to choose between an ISA or fixed rate bond - you can have both. For example, if you prefer predictable returns, you might consider opening a fixed rate bond. At the same time, you might stash your money away in an ISA to take advantage of the tax-free interest on savings up to the £20,000 deposit limit per tax year. This would allow you to combine the steady and potentially higher returns of bonds with the tax advantages offered by an ISA.

If you’re looking for an easy way to earn a profit on your lump sum, putting it into a fixed rate bond might be a suitable option. You can choose the best term for your needs, and you will receive a guaranteed interest rate for your chosen term. It’s important to know that you won’t be able to make a withdrawal before the end of your term, or, if allowed, you might face a penalty such as a reduced interest rate. It might therefore be worth considering how much money you can afford to lock away for the duration of the bond. Our budget planner can help you to assess your finances and determine how much you can comfortably afford to save.

While we don’t currently offer ISAs, if you want to quickly and easily open fixed rate bonds from a range of partner banks and building societies, simply register for a Raisin UK Account to apply online for free today. 

Find out more about how to apply by reading our guide to opening a fixed rate bond.

If you have any further questions, our UK-based Customer Service team is happy to help.