Term deposit explained

Term deposit accounts can be a great way to earn a higher interest rate and are ideal if you have a particular savings goal in mind. If you’re considering opening a term deposit account but want to know more about how these savings accounts work and what to expect, look no further. This page will give you a clear understanding of term deposits and how they can benefit you.

Term deposit ratesTerm deposit ratesTerm deposit rates
The rundown
  • Term deposits are considered a secure way to take advantage of competitive interest rates
  • The longer you lock your money away for, the bigger return you’ll typically get 
  • Term deposits offered by UK regulated banks are protected up to £85,000 per person, per banking group

What is a term deposit?

A term deposit is a fixed term lump sum savings account. Term deposit accounts offer various terms, typically ranging from six months to five years. In the UK, a term deposit is normally called a fixed term deposit or a fixed rate bond. A term deposit account offers competitive fixed interest rates that don’t change from the day you open the account until the end of your agreed term.

Raisin UK offers the following term deposit accounts:

6 Month Fixed Rate Bonds

6 month fixed rate bonds are the shortest term available, which often means they have lower interest rates than longer-term options. They can be a good choice if you want to grow your money as quickly as possible without taking any risks.

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1 Year Fixed Rate Bonds

1 year fixed rate bonds are a type of short-term fixed rate savings account. They allow you to grow your money and benefit from a competitive rate of interest, providing you adhere to the terms of the bond.

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2 Year Fixed Rate Bonds

2 year fixed rate bonds are one of the most common forms of fixed rate savings accounts, offering savers competitive rates of interest and the chance to grow your money on a relatively short yet manageable timescale.

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3 Year Fixed Rate Bonds

3 year fixed rate bonds typically offer savers slightly higher rates of interest than 1 and 2 year fixed bonds due to the longer timeframe that your money is locked away for.

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5 Year Fixed Rate Bonds

5 year fixed rate bonds offer a bigger return on your investment due to the compounding effect of interest that occurs each year, as well as a bonus when the bond matures.

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How do term deposits work?

You can open a term deposit account by depositing a lump sum that you set. Once you transfer your deposit, you can sit back and watch your savings grow. A term deposit account typically has a minimum deposit of £500 to £1,000 and a maximum of as much as £2,000,000. At Raisin UK, we want to keep your savings safe, so we’ll only let you deposit up to £85,000 per person, per banking group. This means your full deposit amount will be protected in the event the bank becomes insolvent and fails.

When you open a term deposit account, it’s important to understand that you won’t usually be able to make any withdrawals until you’ve reached the end of your fixed term, when you’ll receive your deposit plus any interest you’ve earned. Some financial institutions may allow you to make a withdrawal before the end of your term, but you will have to close your account and might receive a penalty on any interest you’ve earned.

Benefits of term deposits

The main benefit of opening term deposit accounts is that they typically offer the highest interest rates of any type of savings account – and with minimal risk. 

Term deposit rates are fixed, so they won’t change for the duration of your term. This means your growth is guaranteed and you won’t need to worry about the interest rate falling. Plus you’ll know exactly what you’ll earn before you start saving. A term deposit account also removes any temptation you might have to spend your deposit. This makes them an ideal option if you’re saving for a specific goal, for example, buying a new car

Another advantage of term deposit accounts offered by UK regulated banks is that they’re protected by the Financial Service Compensation Scheme (FSCS). The FSCS protects up to £85,000 of your savings per person, per financial institution. This gives you the confidence that if the financial institution fails, your savings will be safe and you can claim your money back. All of our partner banks are regulated, meaning that whatever savings account you open through our marketplace, your deposits are protected.

Is a term deposit right for me?

Term deposit accounts might be right for you if you have a lump sum you can lock away for a fixed term. This type of savings account might be a good choice if you plan to save for a once-in-a-lifetime holiday, for your grandchildren, or perhaps for a wedding. If you are committed to storing your money for a fixed term and you know you won’t need to make a withdrawal, it’s worth considering term deposits.

A notice account is a good alternative if you are unsure when you will need to withdraw your money. Notice accounts offer competitive variable rates and the flexibility to withdraw your money after a set notice period, typically between 30 and 90 days.

How much can you earn from a term deposit?

At Raisin UK, you can currently earn up to 2.10% annual equivalent rate (AER) from a term deposit, but how much you earn will depend on various factors, including the following:

  • The length of your term
  • The amount you deposit
  • How interest is paid
  • The interest rate.

When calculating how much you’ll earn from a term deposit, it’s also worth considering if you’ll need to pay tax on your savings. As a taxpayer, you can earn tax-free interest on your savings up to set amounts, depending on the rate of tax you pay. The personal savings allowance (PSA) allows basic-rate taxpayers to earn up to £1,000 of interest per year without paying any tax, while higher-rate taxpayers can earn up to £500 per year tax-free. Additional rate taxpayers do not receive a PSA, meaning all interest earned on their savings is taxed at 45%.

Applying for term deposit accounts

If you want to quickly and easily open term deposit savings accounts, register for a Raisin UK Account for free and log in to apply.

If you have any questions, our UK-based Customer Services Team is happy to help.

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