In our previous blog entry, we discussed the decline in the popularity of ISAs and alluded to some alternatives that investors might find appealing.
One key alternative to opening an ISA is investing in a fixed rate savings bond.
The average yield of fixed rate savings bonds has increased by over 20% on average since February, with 3 year fixed rate bonds reaching the average rate of 1.3% in May according to the Bank of England.
In practice, these bonds work almost exactly like savings accounts. Investors can put their money in and expect a fixed-percentage yield in return.
Unlike many other savings accounts, however, fixed rate bonds effectively lock an investor’s money in for a set term length. If you choose to invest in a fixed rate bond, you won’t be able to retrieve the money you put into it until a set period of time has elapsed.
Compare the Top 10 UK Fixed-Rate Bonds
But what is it that makes fixed rate savings bonds appealing, and who are they for?
1. The allure of fixed rate savings bonds
In general, savings bonds tend to be higher-yield than ISAs and similar savings accounts. These bonds are able to produce significant revenue streams because they lock savers’ money away for fixed periods. A bond is effectively a loan to an organisation.
The aspect of fixed rate savings bonds that may seem most disadvantageous is actually their greatest strength. Because they offer fixed rates, investors can also feel fairly sure regarding how much money their investment will yield.
Of course, bonds don’t always pay off. Although this is looking unlikely, interest rates can go up, potentially leaving bond savers on a poorer rate. However, the reverse can be true.
Savers who may have taken on a savings bond 4 years ago could be at a much higher rate than those currently offered in 2017.
Of course, bonds aren’t perfect. They may not be as profitable as investments in stocks and shares and other investment opportunities (though the value of these investments carries a higher risk).
The fact that they prevent savers from accessing their money for fixed periods may also be a problem for some individuals if they do not have easily accessible savings elsewhere.
Currently, it can be difficult to beat the UK’s rising inflation of 2.7% with any of the savings bonds on offer. Rates have improved slightly in 2017, with online-only challenger banks offering market leading rates compared to the pitiful interest offered by high-street banks.
2. The people who choose savings bonds
Fixed rate savings bonds appeal to a wide variety of investors:
- They appeal to individuals who can afford to tie up their money for significant periods of time.
- Those who look beyond high-street names in search of the best rates.
- Those who have used all of their ISA allowance for the financial year.
- Those who seek a regular income from a lump sum.
- Sophisticated and high-net-worth investors who understand the different bond types and wish to diversify their investment portfolio
- Many fixed-rate savings accounts are popular with the over 60s, as they wish to generate an income on top of their pension income.
- Think interest rates will continue to remain low for the foreseeable future.
If you fit any of these criteria, a bond may be well worth considering.