With the UK economy’s future looking rocky and uncertain, it has never been more important to invest money wisely. Unless you work in the finance sector, banking and investing can often seem like it’s loaded with confusing jargon.
One aspect of saving that many people get stuck on when choosing how to save money is whether to use a fixed rate bond or a variable rate savings account. This guide looks at the difference between the two and how they could affect your savings.
Remember that any investment, including savings and bonds can have varying risks, but some safeguards are in place for UK savers.
Variable Rate Savings Accounts
Many banks and building societies offer variable rate savings accounts that fluctuate in accordance with the Bank of England’s rates.
As a result, your interest rates could rise or fall depending on the economy, inflation and the underlying interest rate set by the Bank of England.
If the interest rates rise, you could stand to earn more interest than you would do with a fixed rate savings account.
Likewise, you can earn a lot less in interest if the bank chooses to lower its interest rates. With this account you will get flexibility and the option to be able to act fast should rates change.
Fixed Rate Bonds
Fixed rate bonds are investments in which you lend a bank, institution or building society a sum of money. In return, the recipient of your bond agrees to pay a rate of interest on top of the sum of the bond over an agreed period of time.
For example, a one-year fixed rate bond with a 5% interest rate would give you a return of 5% on top of your initial bond at the end of the 12-month period.
From a saver’s perspective, a fixed-rate bond can often appear the same as a savings account. In fact, many banks and building societies will often advertise a product as a fixed-rate savings account when it is actually a bond.
In general, the longer the term length of the bond, the better the interest rate given. The downside of this is that if rates rise, you may be stuck on a lower rate until the bond reaches maturity. It could be an agonising wait until you can access your funds.
Although some accounts do allow early withdrawals, there is often a significant penalty, which could wipe out any return you were due on your money.
Choosing whether you wish to invest in a fixed-rate bond or a savings account will depend on your personal situation, the financial climate at the time, as well as thecurrent bond rates offered by banks.
Best Savings Rates’ in-house software compares the rates of savings accounts, fixed-rate bonds, peer-to-peer financing, as well as many other investment opportunities. Be sure to check which providers offer best rates for your investment.Last updated: November 6th, 2017