What is a Fixed Rate Bond?

A fixed rate bond is a short, medium or long-term savings plan that pays a fixed rate of interest for a specified period. You agree on the fixed interest rate and how long you’ll save for before you deposit any money. At the end of the agreed term or maturity date, any interest you’ve earned is added to your deposit and paid back to you.

Unlike other savings plans where you can deposit money regularly, a fixed rate bond usually requires a single lump sum deposit to get started. To open one, you need to be 18 or over and a UK resident. It’s important to know that you usually can’t access your money during the agreed term. Once the term is up, you’ll receive your initial deposit plus all the interest that’s built up.

Thinking about what to do with your hard-earned cash can be tricky, so we’ve put together this guide to tell you everything you need to know about fixed rate bonds.

Here’s a quick summary:

• What is it? A savings plan with a fixed interest rate for a set period (short, medium, or long-term).
• How it works: You agree on the interest rate and term before depositing a lump sum. Your money is then locked away, and you can’t access it until maturity.
• Deposit: Requires a single lump sum deposit; multiple deposits are not allowed.
• Withdrawals: No withdrawals can be made during the term.
• Payout: On the maturity date, you receive your initial deposit plus the interest you’ve earned.

• Eligibility: Must be 18+ and a UK resident to open a fixed rate bond.

Common Fixed Rate Bonds terms explained

If you’re new to saving, before you take out a plan there can be a lot of terminology to wrap your head around when saving for long-term goals. Here are some of the key words you’ll come across:

• Term: The length of time you agree to save for and receive interest payments. This can be anything from a few months to several years, depending on the provider and the specific bond.
• Maturity: The date when your fixed rate bond comes to an end. At maturity, you get your initial deposit back, plus any interest you’ve earned.
• Interest rates: The interest rate on a fixed rate bond is the fixed percentage that your deposit will accrue annually, semi-annually or monthly. This interest rate remains constant throughout the bond’s term, regardless of any changes in the market rates.
• Accrued interest: This is the total amount of interest you will earn on top of your initial deposit once it has reached maturity.

How do Fixed Rate Bonds work?

Fixed rate bonds are a straightforward way to save:

1. Deposit: You make a one-off lump sum deposit.
2. Fixed term: You agree to lock your money away for a set period. For example, the Shepherds Friendly Fixed Rate Bond has a 5-year term.
3. Guaranteed interest: The provider (a bank or building society) pays you a guaranteed rate of interest on your deposit for the entire term.
4. Maturity: When the bond matures, you get your initial deposit back plus the interest you’ve earned. You can then choose to reinvest the money or use it for something else.

What is the difference between a Fixed Rate Bond and an ISA?

There are key differences between a fixed rate bond and an ISA, highlighted in the table below.

Feature	ISA	Fixed Rate Bond
What is it?	A tax-efficient ‘wrapper’ for your savings.	A savings account with a fixed interest rate for a set period.
How your money grows	Interest or investment growth.	Fixed interest rate.
Term	No locked term for most ISAs, except some Cash ISAs with fixed terms. Can invest for as long as desired.	Predetermined term length ranging from a few months to over five years.
Interest rate	Cash ISAs may have fixed or variable rates. Stocks and Shares ISAs depend on market performance, with no guaranteed rate.	Fixed interest rate known at the outset of the plan.
Tax on your returns	You don’t pay tax on interest or investment gains.	You pay income tax on interest.
How to get started	You can start with a lump sum or regular payments within the annual ISA allowance.	Usually one lump sum deposit to open the account. Amount depends on the provider.
Accessing your money	Usually easy access, but some have fixed terms.	Your money is locked away for the agreed term.
Level of risk	Varies by type. Cash ISAs are guaranteed to receive back at least what you’ve put in. Stocks and Shares ISAs carry higher risk due to market fluctuations. Recommended for medium- to long-term investments (5+ years).	Low risk. You’re guaranteed to receive your initial deposit and any accrued interest.
Best for…	Long-term savings goals like retirement or a house deposit.	Short to medium-term goals where you don’t need access to your money.

Your ISA allowance for 2024/25 is £20,000.

Always compare interest rates and terms as they vary between providers, so shop around for the best deal.

What different types of Fixed Rate Bonds are there?

Fixed rate bonds come in different shapes and sizes, depending on who’s offering them. It’s worth having a think about what you want to achieve from your plan before deciding on one.

Usually, the longer you lock your money away for, the higher the interest rate you’ll get. But this isn’t always the case, as it depends on what interest rates are doing generally. For example, if interest rates are high, some providers might offer better rates on shorter-term bonds because they expect interest rates to fall in the future.

It’s also important to compare rates from different providers, as they can vary quite a bit. And if you have a specific amount in mind that you want to save, check if the provider has any minimum or maximum deposit limits.

For more information, read our guide on what a savings bond is.

Can you have multiple Fixed Rate Bonds?

You can hold multiple fixed rate bonds. This can be a good way to manage your savings and reach different goals. For example, you could have one fixed rate bond maturing in a year for a short-term goal and another maturing in five years for a longer-term goal. Just remember that your money is locked in for the term of each bond.

Combining different Fixed Rate Bonds

While other savings plans can allow you to make monthly direct debits, you can usually only make an initial payment into a fixed rate bond. Typically, you won’t be able to make any additional contributions once you have deposited your initial amount, however, you can open additional fixed rate bond plans if you do not exceed the provider’s maximum amount. This would allow you to make the most of a different provider’s interest rate, if you notice a higher allowance once you’ve already taken out a plan.

What happens when a Fixed Rate term matures?

Once your fixed rate bond matures and you receive your payout, you have several options:

• Reinvest: You could put the money into a new fixed rate Bond, or explore other savings and investment options, like a Stocks and Shares ISA if you’re comfortable with a bit more risk.
• Save: You could move the money into an easy-access savings account, giving you more flexibility.
• Spend: You could use the money for whatever you were saving for, like a house deposit, a new car, or a holiday.

How are Fixed Rate Bonds taxed?

Fixed rate bonds are subject to the personal savings allowance. If you earn anything over £1,000 in interest you would be taxed at a rate of 20%. However, if you are a higher rate taxpayer your personal savings allowance will be lower, so you will be taxed at 40% once your accrued interest is over £500. If you are an additional rate taxpayer, you won’t get a personal savings allowance. For more information visit the government’s guide.

Are Fixed Rate Bonds secure?

A fixed rate bond is a relatively safe savings plan as you get what you deposited back, plus any interest. However, fixed rate bonds are cash based, so your savings haven’t kept up with inflation.

Also, interest rates can change, and you may find a higher interest rate compared to the plan you took out.

Is a Fixed Rate Bond right for you?

Fixed rate bonds can be a great option for some savers, but they’re not right for everyone. Here’s a summary of the main advantages and disadvantages to consider before applying for a fixed rate bond.

A fixed rate bond might be the right option for you because of:

• Higher interest rates: Fixed savings bonds typically offer higher rates than regular savings accounts, often above the Bank of England base rate.
• Stability: The interest rate is fixed for your term, unlike variable rates in regular savings accounts or cash ISAs.
• Security: Your money is protected by the Financial Services Compensation Scheme (FSCS). This means your investment in this guaranteed Fixed Rate Bond is completely covered by the FSCS
• Reduced temptation: If your money is locked away, you’re less likely to dip into it.

However, a fixed rate bond might not be the right option for every saver. Here are a few disadvantages you should consider:

• Inflexibility: You can’t access your money during the fixed term without incurring penalties. Funds are locked in a set term from 6 months to 5+ years. Early withdrawal may incur penalties.
• Tax implications: You might have to pay tax on the interest you earn.

Interest rate changes: If Bank of England rates rise, you can’t switch to a better rate during your fixed term.

You can open a Shepherds Friendly 5 Year Fixed Rate Bond from £1,000 up to £125,000 at a fixed rate of 4.62% AER. With our Fixed Rate Bond, you can rest easy knowing that your money is growing, which lets you plan for your years ahead with certainty.

Read through our Important Information Guide for all the key information about our 5 Year Fixed Rate Bond.