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.

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.

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.

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:

6 Month Fixed Rate Bonds

1 Year Fixed Rate Bonds

2 Year Fixed Rate Bonds

3 Year Fixed Rate Bonds

5 Year Fixed Rate Bonds

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.

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.

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

While we don’t currently offer ISAs, if you want to quickly and easily open fixed rate bonds from a range of partner banks, simply register for a Raisin UK Account to apply online for free today. 

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.