With a fixed-term account, you can't access your money until the end of the term - in return, you will get a higher rate of interest than an easy-access or notice account. You may also see fixed-term accounts referred to as fixed-rate savings accounts or fixed-rate bonds.
You can have a look at the fixed-term accounts options at the end of this page.
Key factors for a fixed-term accounts
are:
- Accessible at the end of the term. Your money is accessible at the end of the term. Some accounts will let you access the money with a penalty, but others will not allow you to access unless in "exceptional circumstances". Check what the meaning of exceptional circumstances is; with an account I have, they will only let me access if I go bankrupt!
- Opening balance. Fixed-term accounts tend to have a higher minimum balance than the other accounts. For example, accounts offering the the highest 3 interest rates for a one-year fixed period at the time of writing have a minimum of £10,000, but the 4 th highest rate has a minimum of £1,000. Most of these accounts have a funding window - you'll have, for example, a 14 day period to in which to pay in money. Once that window closes, you can't pay in any more money, and if you don't pay in the minimum, the account will close.
- Maximum balance. Fixed-term accounts also have a maximum balance. As with the other accounts we've discussed, it is not uncommon for the maximum balance to be £85,000 (in line with the Financial Service Compensation Scheme (FSCS) protection), but other accounts are up to £5,000,000. If you are fortunate enough with these sums of money, a fixed-term savings account may not be your best option!
- Interest rate. Interest is expressed as a percentage followed by AER (annual equivalent rate). For example, 3% AER - this means you'll get £3 interest a year for every £100 that you have had in the account for 12-months. If your money has been in the account for less time when the interest is paid, the interest payment is adjusted to reflect that. Fixed-term savings accounts have a fixed-rate, so the rate is guaranteed for the period of the account.
- Interest payments. There's an important distinction with fixed-rate accounts. Accounts will pay the interest back into the account annually (and you can access on maturity), annually into another account, or give you the choice. For tax purposes, you are considered to have earned the interest in the tax year in which the interest becomes available to you.
- Example. Here's a useful example to explain the last point above. Let's say you have a 3 year fixed term paying 4% interest, and you deposited £10,000. You have the option of receiving the interest into a separate account, or being paid back into the fixed-term account:
- Option 1. Interest goes to separate account. Annual interest earned each year = 4% of £10,000 = £400. As this is less then the Personal Savings Allowance (PSA) for both a basic-rate, and higher-rate taxpayer, you don't pay any tax on this interest (assuming you don't go over your PSA with other accounts). The total money at the end of the 3 year period is therefore £11,200.
- Option 2. Interest is paid into the Fixed-Term Account. In year one you earn 4% of £10,000 = £400. In year 2 you earn interest on the previous years interest, so 4% of £10,400 = £416, and in year 3 you earn 4% of £10,816 = £432.64. Your total at the end of year 3 is therefore £11,248.64. However, as year 3 is when you are able to access the interest, you are considered to have earned the interest in that year, so you have exceeded your PSA. If you're a basic-rate tax payer, you'll pay 20% tax on anything over £1,000 (20% of £248.64 = £49.73). You would therefore have £11,198.91 at the end of 3 years, as opposed to £11,200 from option 1. Not a huge amount less, but worth doing the calculations, particularly if the time period is longer, interest rate is higher, or the initial deposit is higher. If you're a higher rate tax-payer, this will hurt more. You would now pay tax on anything over £500 and at 40%. So you'd pay 40% of £748.64 = £299.45. This would mean you would have £10,949.18 with option 2; £250.82 less than with option 1.
- Protection scheme. Ensure the account is protected by the Financial Service Compensation Scheme (FSCS). If your provider goes bust (it happens!), you'll be compensated for all the money you have in the account up to £85,000 for a single account, or up to £170,000 for a joint account.
ALWAYS READ THE TERMS AND CONDITIONS OF THE SAVINGS ACCOUNT BEFORE YOU COMMIT
What I have done. I have a one-year fixed-term account that I set up at the start of the year. I've purposely kept the amount of money in the account at a level that I won't have to pay tax on any of the interest I earn.
