What are fixed rate bonds with access?

Trying to find the best Fixed Rate Bonds can involve plenty of thought and consideration, as the quest to locate a perfect fit for requirements and expectations may be a timely one. An important factor to be considered is whether Fixed Rate Bonds with access are something that could be appealing.

How do Fixed Rate Bonds with access differ to those without?

Fixed Rate Bonds work by giving the investor a predetermined, set rate of interest that they will receive for the length of time they hold the bond. This will not alter, and the longer you are prepared to hold the bond, the higher the rate of interest. Savers put a lump sum into their Fixed Rate Bond at the outset, which cannot be accessed until the bond matures, meaning the money is ‘locked in’. Some Fixed Rate Bonds however, feature early permitted access as one of their selling points, thus giving savers the option to be able to withdraw cash during the Bond's term length, should they so desire. 

Benefits of Fixed Rate Bonds with no access

The biggest advantage of having a Fixed Rate Bond with no access is the opportunity to enjoy interest rates higher than other savings accounts. Savers are rewarded for the amount of money they are able and willing to lock away for the longest time with some excellent rates, making them a very competitive option for those who have perhaps received an amount of money they have no immediate plans for. As the interest rate that will be received is known from the moment the bond is opened, plans can be made based on accurate calculations as to what money will be received upon maturity. Any falls in the base interest rate that may be felt by other savers won’t be felt by those with a Fixed Rate Bond, granting holders a strong element of protection, tempered only by the fact that should interest rates rise, the advantages of this are reversed. When looking for the best buy Fixed Rate Bonds, everything that appears most attractive, and therefore at the top of recommended lists, will usually have no access. As a general rule, the more flexible a Bond is, the less rewarding it will be. Variety usually exists in how interest is paid, from how often this occurs, to where it accumulates. In some Fixed Rate Bonds it is added to the lump sum, whilst others allow interest to be paid into a separate account; something that savers can often use to their advantage, either by reinvesting or spending.   

Benefits of Fixed Rate Bonds with access

While the majority of Fixed Rate Bonds offered today specify clearly that access to money is not allowed during the length of the bond, there are some that do allow this to happen. This usually comes at the cost of lower interest rates and alongside some other stipulations, in the form of penalty charges and loss of interest. The advantages of having access to the money stored within a Fixed Rate Bond centre around additional financial security; if there is an unforeseen problem or issue that may occur in a savers life for which they may require finances to be unlocked, they can do so. Another appealing draw is the fact that whilst Fixed Rate Bonds without access may offer higher interest rates, as detailed above they cannot take advantage of rises in the general interest rate. If these should be significant enough to warrant it, it is possible to remove money from a Bond with access for reinvestment elsewhere. Whether this is a good idea or not would depend on many factors, not least of which would be some sort of insight into where the economy is headed in the longer term; a short-term spike of raised interest wouldn’t justify any penalty charges associated with withdrawing capital. 

Other considerations

Removing money from a Fixed Rate Bond with access needs to be done in the right circumstances, and after careful thought. There could be situations where paying any penalty charges are a good idea, in order to free up money for other uses. As these fees range depending on the terms of the Bond, calculating a point at which it is more profitable to pay them and reinvest than leave them be is necessary. How far into the term of the Bond the saver is will also be a factor. To minimize penalties, removing money from the Bond directly after an interest payment has been made is usually a sensible idea.

Savers also need to be aware of exactly how any penalty charges work, to avoid the potential of not just losing their interest, but also some of their initial lump sum deposit. Many Fixed Rate Bonds with access will specify that early closure will result in a charge equivalent to a certain period of interest, for example, 100 days. If this interest has not so far been accrued, the amount will be taken from the Bond regardless, and savers removing their cash could find themselves with less than they put in. Paying close attention to whether this is the case or not is of utmost importance when considering early access.

Provided for informational purposes only. Not designed as advice. Speak to your IFA or tax advisor for advice tailored to your individual circumstances.