Is a fixed rate bond a suitable investment?

In today’s day and age of falling interest rates and economic uncertainty, everyone in the UK needs more from their savings. If stocks, options, and currencies seem like a risky endeavor, fixed rate bonds provide you with another investment option.

How fixed rate bonds work

Building societies and banks pay you interest rates in exchange for investing your cash in any of their various savings accounts.

However, a fixed rate bond can earn you a significantly higher rate of interest than today’s savings account interest rates, because the fact that your money is locked in for a specific term provides them with added security.

You simply need to ensure that you do not withdraw the money before the expiration of the fixed term. Otherwise, a penalty will be levied against you.

Essentially, fixed rate bonds are accounts where you willfully agree not to touch the money in the account for a specified period of time, which is usually from six months to five years.

The bank or account provider provides you with a guaranteed fixed interest rate in return for holding your money for a guaranteed length of time.

With a fixed rate bond, even if rates fall, you are guaranteed to receive the same fixed interest rate, providing you with security in an uncertain market.

Rates tend to vary substantially in the fixed rate bond market, so you must compare the terms and interest rates of numerous fixed rate bonds to find the one that best suits your needs.

Fixed rate bonds are ideal for prudent investors

Every financial advisor will advise you to keep three to six months of salary in an easy access savings account to use as an emergency or rainy day fund.

Since money cannot be withdrawn from a fixed rate bond account without incurring a hefty penalty, or it is not able to be withdrawn at all, only savings beyond six months of salary should be invested in a fixed rate bond.

This makes fixed rate bonds an ideal savings vehicle for individuals looking to earn increased interest from a secure investment.

The amount of money needed to invest

Fixed rate bonds are ideal for individuals with a lump sum of money that they would like to invest. In fact, most fixed rate bonds require a substantial minimum deposit of £1,000 to £2,000.

The maximum deposit allowed for a fixed rate bond is typically £500,000. However, fixed rate bonds vary depending on the institution, so you should check the fine print to ensure that the bond is suitable for you.

In some cases, the interest rate you can earn from a fixed rate bond is tiered based upon the amount of money that is invested in the account. So, you may be able to earn a higher interest rate by investing more money.

The risks involved with investing in fixed rate bonds

Unlike stocks and other investment vehicles, the money you invest in a fixed rate bond cannot be lost or diminished. In fact, the balance is guaranteed to grow over time. However, it will not grow as noticeably as other potentially volatile investments.

A fixed rate bond is nothing more than a loan you are providing to the bank or provider in exchange for a higher interest rate than you would earn from a standard savings account.

Unfortunately, you risk tying up your money for a lengthy amount of time. Once you opt for a fixed rate bond, you are stuck with it for the long haul.

This means that if the market turns and interest rates rise, you could be left earning lower interest rates than you could have earned from another type of savings or investment product.

Protecting your wealth

When considering a fixed rate bond, it is important to consider that the Financial Services Compensation Scheme only covers your deposits up to £85,000 for a single account or £170,000 for a joint account.

Therefore, you are only covered for these amounts if the bank goes under. If you are fortunate enough to have more than this to invest, you should not invest more than the covered amount with each institution.

Be careful when doing your due diligence as well, because some banks that go by different names may in fact be owned by the same firm. For instance, HSBC owns First Direct, so you would lose half of your investment if HSBC collapses and you had £85,000 saved in each.

Fixed rate bond alternatives

If you would like to have access to your money, there are other options for you to choose from. Just remember, the more restrictions placed on an account, the higher the amount of interest it will typically earn.

A traditional savings account that requires you to deposit a certain amount each month could provide you with a decent return. Also, some accounts will allow you to earn a higher rate of interest in return for only having a limited number of withdrawals each year.

Thankfully, there are numerous fixed rate bond and savings account options for you to choose from, making the process of selecting the right savings vehicle all the easier.