Fixed rate bonds vs ISAs
It’s important to choose the right type of savings account for you, and this will often depend on your savings goals, how you want to save and your financial position. When considering different types of savings accounts, you may find yourself asking the question, “should I open a bond or isa?”
On this page, you’ll learn more about what fixed rate bonds and ISAs are, understand the differences between them and find out what to consider when opening fixed rate bonds or ISAs.
- Guaranteed rate: Fixed rate bonds provide a guaranteed rate of return as long as you lock your money away for a set period of time
- Tax-free savings: ISAs are tax-free savings accounts that allow you to save up to £20,000 tax-free per year
- Key factors: Whether a fixed rate bond or an ISA is best for you depends on various factors, including your financial goals, how much you have in savings and whether you’re eligible for the personal savings allowance
What's on this page
What are fixed rate bonds?
A fixed rate bond is a type of savings account that locks your money away at a fixed rate of interest for a fixed time, usually between six months and five years. Fixed rate savings accounts typically offer competitive interest rates that won’t change from the day you open the account until the end of your agreed term.
This provides the certainty of a guaranteed return, which is especially reassuring in times of interest rate volatility. The amount of interest you’ll earn will also depend on the amount you’re willing to deposit and the term you choose. In general, the longer you lock away your money in fixed rate bonds, the higher the interest you’ll receive at the end of the term.
What are ISAs?
ISAs, or individual savings accounts, are tax-free savings accounts. You can save up to £20,000 per tax year without paying tax and choose from different types of ISAs, such as cash ISAs, stocks and shares ISAs, innovative finance ISAs and lifetime ISAs. If you’re the parent or guardian of someone under the age of 18, you can also set up a junior ISA on their behalf.
The most common ISAs are cash ISAs, and there are three different types of cash ISA, including the following:
- Instant access ISAs, which provide the flexibility to withdraw your savings without penalty
- Regular savings ISAs, which offer competitive interest rates over a certain period of time as long as you deposit a certain amount each month
- Fixed rate cash ISAs, which are similar to fixed rate bonds in that you commit to locking your money away for a certain period of time to earn a fixed interest rate
Historically, fixed rate cash ISAs have proven to be a better choice than an instant access ISA for those looking for a return on their investment. However, even these accounts typically offer less competitive rates than other normal fixed savings accounts like fixed rate bonds.
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What's the difference between fixed rate bonds and ISAs?
Fixed rate bonds
- Fixed rate bonds typically offer more competitive interest rates
- You can’t usually withdraw your money until the end of your fixed term
- Deposit a lump sum at the beginning of your term and watch your savings grow
- Deposit almost as much as you want, although the FSCS will only protect deposits to UK regulated banks up to £85,000 per person, per banking group
- The fixed interest rate means you’ll know exactly how much you’ll earn by the end of your term
- Interest is taxable, although this may be irrelevant if you’re eligible for the personal savings allowance
- ISAs give savers the flexibility of making withdrawals (although you may incur a fee, depending on the financial institution)
- The maximum you can save across all your ISAs combined is £20,000 per tax year (typically April 6th to April 5th)
- ISAs typically offer variable rates that aren’t as competitive as fixed rate bonds, but interest rates may increase towards the end of the tax year to encourage savers to deposit up to the maximum allowance before the tax year ends
- Any money you earn from an ISA will always be tax-free
Should I open a bond or ISA?
Choosing between a fixed rate bond and an ISA will depend on your savings goals. It may even be beneficial to open both types of savings account.
If you’ve already reached the ISA deposit limit of £20,000 or you want a guaranteed return on a lump sum that you can lock away until the end of a fixed term, a fixed rate bond might be best for you. However, if you think you may need to access your money, an ISA (or a notice account) might be better.
It’s also important to consider the tax implications when making your decision. One of the main benefits of ISAs is that they’re tax-free. While this may benefit some savers, the personal savings allowance (PSA) means most people don’t pay tax on their savings interest anyway. If you don’t need the tax perks of an ISA (and you can afford to lock away a lump sum) it might make more sense to open a fixed rate bond. The top-paying bonds usually offer more competitive interest rates than most ISAs, giving you a better return on your investment in the long run.
However, if you have substantial savings and are likely to exceed your PSA (£1,000 for basic rate taxpayers and £500 for higher rate taxpayers), an ISA can still provide you with a tax-free way to save. Likewise, if you’re not eligible for the PSA because you’re an additional rate taxpayer, an ISA can help to minimise your tax liability.
Raisin UK offers the following fixed rate bonds:
In this article we cover everything you need to know about the personal savings allowance, including what it is, who it applies to and how it affects tax on your savings income. We also consider the implications for tax-free savings accounts, such as ISAs.Read more
Confused about paying tax on your savings accounts? Read our guide to find out how much you might be taxed, what the personal savings allowance is and all about tax-free savings accounts.Read more
On this page, you’ll learn what a tax-free savings account is, how tax-free savings work and who’s eligible.Read more
Wondering if an ISA or another type of savings account is right for you? Explore what each offers and the differences between them to find out which would best suit your saving needs.Read more
What is the best fixed rate ISA?
The best fixed rate ISA is usually the one with the highest interest rate, as you’ll earn a bigger return on your savings. However, other types of savings accounts might offer different perks or lower charges should you wish to withdraw, so the best fixed rate ISA is ultimately your choice. As is the case when opening any type of savings account, it’s important to do your research and compare the market beforehand to find the best option for you.
ISAs or premium bonds?
If you’re considering an ISA or premium bond, it’s worth knowing that there’s no guaranteed growth on your money if you invest it in premium bonds as you won’t earn interest, although they are a risk-free way to save.
ISAs, on the other hand, pay tax-free interest on your savings every year up to your allowance of £20,000 (2022/23 tax year). You can cash in both cash ISAs and premium bonds at any time.
Are fixed rate bonds worth it?
If you’re looking for an easy way to earn a profit on your lump sum, putting it into a fixed rate bond could be a great choice. It’s important to know that you won’t be able to make a withdrawal before the end of your term, so it’s best to only deposit money you can afford to lock away for the duration of the bond. Our budget planner can help you to assess your finances and determine how much you can comfortably afford to save.
Opening fixed rate bonds with Raisin UK
Find out more about how to apply by reading our guide to opening a fixed rate bond.
If you have any further questions, our UK-based Customer Services Team is happy to help.
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