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Fixed-rate bonds: are you at risk of being trapped?

Why ignoring your provider could damage your savings

People who save using fixed-rate bonds risk having their money trapped with a bank or building society after their bond matures if they don’t take action.

Failing to instruct your provider on what to do when your term ends could result in your money being locked away for another fixed period in a lower interest account.

We reveal what each provider will do with your bond when it matures, and how to make sure you get the best returns on your savings.

The fixed-rate bond trap

Fixed-rate bonds allow you to earn interest on your savings by locking money away for a set period of time.

While interest rates tend to be attractive, problems can arise if you don’t act when your bond is due to mature.

Banks and buildings societies will get in touch with you up to 35 days before your fixed-rate bond term ends, so that you can instruct them on what to do with your savings.

Failing to get back to your provider before your bond matures could result in your money being automatically reinvested in a similar fixed-rate savings product – effectively trapping your cash.

Interest rates available on these accounts will vary, which means that there’s a risk that your money could be locked into a lower rate of interest than when you initially opened your bond.

A number of providers, including Aldermore, Natwest and M&S Bank, will automatically reinvest your savings into a fixed-term bond if you don’t instruct them otherwise before the bond matures.

You then have at least a 14-day cooling-off period during which you can close the account without incurring a charge. With Santander, your cooling-off period is unlimited.

The table below shows the providers that will automatically reinvest your savings and the notice periods they give to allow you to close your account.

Provider Initial letter before your bond matures Follow up letter before your bond matures Cooling-off period after reinvestment
Yorkshire Bank 35 days 14 days 14 days
Clydesdale Bank 35 days 14 days 14 days
Aldermore 21 days 14 days 14 days
Santander 14 days None Unlimited
Natwest 14 days None 30 days
M&S Bank 14 days None 14 days

Other providers will generally move your money to an easy-access account where you can withdraw at any time, though keep in mind that interest is likely to be very low on such accounts.

What if you accidentally miss the cooling-off period?

Unfortunately, there’s very little you can do if you miss the cooling-off period after your money has been reinvested.

Although some providers may allow your account to be closed before the end of its term under exceptional circumstances, most won’t do so unless you pass away.

Even if you are allowed to close your account early, your provider will most likely charge a fee.

M&S Bank, for example, charges up to £100 for closing your account early, while Aldermore charges up to 180 days’ worth of interest for early account closure.

Depending on the interest you accrued, you may end up with less than you put in.

It’s really important to read the terms and conditions of any financial product you take out, and if you have any questions, to get in touch with your provider as soon as possible.

Alternatives to fixed-rate bonds

If you don’t think a fixed-rate bond is the right product for you, there are a number of alternative savings products to consider.

Regular savings accounts

Regular savings accounts require you to make monthly deposits up to a certain limit.

These types of account may limit the number of withdrawals you can make each year, which could be a problem if you need emergency access to your money.

Easy-access savings accounts

Easy-access savings accounts allow you to withdraw money quickly and easily. Some accounts come with a card which allows you to make cash machine withdrawals, while others require you to take out money over the counter in branch.

Notice savings accounts

Unlike easy-access accounts, notice accounts require you to give notice ahead of withdrawing money and these periods can range from 30 to 60 days.

Some accounts may allow you to make an emergency withdrawal outside of the notice period but this may cause you to lose some interest.

Cash Isas

Cash Isas allow you to save up to £20,000 tax-free each financial year. Like with traditional savings accounts there are instant access cash Isas, fixed-rate cash Isas and regular savings cash-Isas which allow you to adapt the product to your own particular saving style and financial circumstances.

Stocks and shares Isas

A Stocks and shares Isa is a tax-efficient investment account that allows you to put your money into a range of different investments.

Unlike cash Isas you should only invest if you’re prepared to risk your money fluctuating dramatically in value.

Finding the best savings account

Before you start looking for a savings account, it’s important assess your financial circumstances and work out what method of saving will work best for you.

For example, if you think you’ll need emergency access to your cash, locking your money away in a five year fixed-rate bond may not be suitable.

Be sure to shop around for a good deal too and pay attention to how interest will be paid into your account and whether making withdrawals could affect your returns.

Which? Money Compare allows you look at hundreds of providers and compare savings accounts to find the best deal. You can also use the tool below to work which type of savings account might be best for you.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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