How Fixed Term Bonds Differ From Instant Access Savings Accounts By Sam Gooch At Isnare.com Ezine Articles

Fixed Term bonds are savings accounts with a difference. To start with, they are more of an investment than simply somewhere to save your cash, and like most investments, they come with an element of risk.

The good thing about fixed term bonds is that as long as you stick to your providers maximum compensation limits, you are only actually risking the potential interest earned, which makes fixed term bonds a very safe investment

Unlike an instant access savings account that has lots of activity with constant withdrawals and deposits, bonds generally only allow you to make a single lump-sum deposit, with no additional deposits throughout the term. Earl withdrawals – though possible, will result in penalties such as having your interest capped or in some cases closing the account completely.

The point of a fixed term bond is to encourage you to leave your savings to grow, and this can be achieved if you leave you're money alone, and make sure you fix an interest rate that is above the Bank of England Base rate. This is because inflation is used to measure the increase in price, so anything below it would effectively cause your money to erode. Once the term reaches an end you are able to access your balance with the added interest.

The main elements of a bond account are the fixed term – this is the period of time you agree to lock your money away for, and the fixed rate – this is the rate at which your interest will be earned.

Another difference between Fixed Term Bonds and instant access accounts is that that the rate offered upon opening the account will not fluctuate to reflect changes made to the Bank rate. This means that your rate will never change, allowing you to calculate exactly what you will earn.

This can be a good thing, as locking in on a high rate will keep your returns high, and should the base rate fall, you can benefit from high interest rates at a time that other savings accounts are paying less.

Last year saw the economy suffer a big blow, which resulted in rates being slashed in an attempt to stimulate the economy by reducing some mortgage holders, and encouraging lending. This had a big effect on the rates offered on savings accounts, so anyone that opened a fixed term bond account before October would be feeling very smug.

This can also work the other way, as you could lock in on a rate, then soon after see rates rise, while you are left behind earning under the odds on your savings.

You can, to an extent, make predictions on the direct the rate is likely to go. It was widely know that rates would be lowered due to the economic downturn, and as a result many savers would have taken the opportunity to fix a good rate. Many economists believe that rates will fall to 0% over the next few months, so although this does not see much of a fall from the current 1% rate, you have to remember that there are many fixed rate accounts offering rates that sit well above the base rate.

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