Ask Anna - Fixed rate bonds are paying higher rates but are they safe?

05th July 2018

Q: Fixed rate bonds are paying higher rates but are they safe?

Are they safe?

Anna’s answer:

This type of account is an important part of the savings market but there can be confusion surrounding the actual term ‘fixed rate bond’, so it’s important to tread carefully to make sure you are signing up to what you expected.

Savers looking to boost their returns are becoming increasingly tempted by ‘bonds’ that are passing themselves off as, or look very similar to, cash savings accounts - but are actually investments and can carry a higher level of risk than a savings account.

The fixed rate bonds that we monitor and provide information on are standard savings accounts. This type of savings account offers a fixed rate of interest for a fixed period of time, which typically ranges from one to five years, although there are both shorter and longer terms available.

You’ll know exactly what interest you will receive at the end of the term, although you will be tied into the account for the whole period, so you will not be able to access your funds, unless you pay a hefty penalty (if the provider allows this option).

The top-paying interest rates currently available range from 2.05% gross/AER for 1 year, from Atom Bank to 2.67% gross/AER for 5 years, from Secure Trust Bank. For more information on the options available, please take a look at our fixed rate bond best buy tables

Essentially, in exchange for a fixed return, you agree to stay put in the account, which is great if rates are falling, but the opposite is also true; if interest rates are improving, you may find that the rate is no longer competitive.

It is also worth noting at this point another type of cash savings account, which works in a similar way to a fixed rate bond. Sharia compliant fixed term deposits comply with Islamic law but are available to any saver, regardless of religion or culture. Sharia law states that money had no intrinsic value, therefore the payment and receipt of interest is forbidden.

Instead, Sharia compliant accounts pay an 'Expected Profit Rate' as an alternative to interest, which is the level of profit paid by the provider to the saver.

Please refer to our Sharia account best buy table for more information and take a look at our recent article here for more on Sharia accounts and how they work.

As with any cash savings account, fixed rate bonds and Sharia fixed term accounts do not pose a risk to your cash, as long as you keep the amount with the Financial Services Compensation Scheme (FSCS) limit of £85,000 per person, per banking licence. If you do this, even in the worst case scenario that the provider you choose goes out of business, your cash will be protected.

In addition to these cash savings accounts, there are a number of investments on the market that include the term bond in the name, such as Corporate Bonds and these are not to be confused with a cash fixed rate bond. Increasingly in recent years, there have been alternative forms of account, such as Peer-to-Peer lending, which often use the term ‘bond’ in their marketing and literature.

We’re not saying that there is anything wrong with these products per se, but it’s important to ensure that you really do understand what you are putting your savings into, how it differs from cash and that you understand the risk implications, before you make any investment decisions - which is what these bonds are.

The trouble with the word ‘bond’ is that it’s applied to so many variations of both investment and savings products, so it can be hard to differentiate between them and that is why consulting a good, reputable adviser is key.

One series of products we are often asked about are the Castle Trust ‘Fortress Bonds’, which currently pay 2.50% AER on a one year bond and up to 3% AER on a five year bond. Not a huge difference in rates to standard cash savings accounts considering the additional risk involved.

These bonds are loan notes – primarily to UK residential property owners, secured by a mortgage. Therefore, they hold a very different risk to deposits placed directly in a bank or building society savings account.

The Financial Services Compensation Scheme (FSCS) limit of £50,000 for investment products applies to these bonds if Castle Trust was to fail and if the claim is validated.

This is a very different scenario and offers far less protection than you would have in a cash-based savings account, which is a simple, guaranteed £85,000 per person, per banking licence.

We have even seen ‘bonds’ advertised that are paying 8% or even 30%! In these days of low interest rates, when you see anything paying a rate that looks too good to be true, then be aware that it will not be a cash savings account, so you need to make sure that you know what you are getting.

If you are in any doubt, refer to our fixed rate bond and Sharia account best buy tables, which contain only cash savings accounts, as that is what we specialise in.

If you need any further help with finding the accounts that are most suitable for your needs, please call us on 0800 011 9705 to speak to one of our expert savings specialists.

And if you feel that you would benefit from speaking to a Chartered Independent Financial Adviser, call Claire or Leighton on 0800 011 9705 who will help you to find the right person to help you.


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