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24 Apr 2018

Ask an expert: should I save my money in a fixed-term bond or an Isa?

We compare bonds vs Isas for best rates and tax-free allowances

Every week, Which?'s money experts answer your financial queries. You can submit your questions to money-letters@which.co.uk, or via our Facebook or Twitter pages.

Q: I want to take advantage of the improved savings ratesI've been seeing on the market and I'm willing to lock away my money for several years, but I don't know whether an Isa or a bond would be better? How do they work and is there much of a difference?

Submitted via email

A: It's true that the number of attractive savings options is growing - especially since inflation dipped to 2.5% in March, meaning that more accounts out there can beat inflation and help your money grow.

So, what's the difference between bonds and Isas? And which is the right option for you?

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Savings bonds vs Isas

While fixed-rate savings bonds and fixed-rate cash Isas are fairly similar - both offering secure accounts in which to save your money - there are a few subtle differences that may affect your decision.

Going for a fixed-term option usually means you will either be unable to access funds paid into those accounts until the term has ended or, if there is the option to withdraw money early, you'll have to pay a fee or have a certain amount of interest deducted.

The table below outlines some key factors to consider.

While the best fixed-term bond rate currently offers a better return by 0.35%, it's important to remember that money saved into a bond won't be tax-free.

If you have a sizeable chunk of savings that is likely to earn more than your personal savings allowance, then you'll pay tax on the profits made from your savings interest.

And if you're an additional-rate taxpayer, you'll pay tax on all interest earned from savings because you don't get a personal savings allowance.

In these instances, it is worth going for a slightly lower interest rate in order to keep your money tax-free.

The downside is that you'll have to keep a note of how much you've paid into your Isa over the course of the tax year, as you'll have to declare the extra amount to HMRC - and any profits that money made will be taxed.

What's more, while you're able to open and pay into as many savings accounts as you like, you're restricted to only paying into one cash Isa. But, if you have a stocks & shares or innovative Isa, you can pay into either of those at the same time as your cash Isa, as long as the total payments don't exceed £20,000.

What are the best fixed-rate bonds and Isa accounts?

The Which? Money Compare comparison tables let you search hundreds of savings and Isa accounts to help you choose a great deal based on quality of service as well as cost and benefits.

Fixed-term savings bonds

There are currently three accounts offering the highest interest rate of 2.65% AER.

United Bank UK's five-year fixed-term deposit account offers 2.65% AER on balances from £2,000-£1m, with the interest paid monthly. You'll lose 365 days' interest if you choose to close the account before the five-year term is up.

Secure Trust Bank five-year fixed-rate bond pays interest at the same rate, but annually. The minimum balance is £1,000, with a maximum of £1m, and no withdrawals are allowed for the term of the bond.

The Vanquis Bank five-year fixed-rate bond also requires a minimum of £1,000, and allows a maximum of £250,000. The 2.65% AER interest is paid monthly.

Fixed-term Isas

You'll need a minimum deposit of £5,000 for Shawbrook Bank's five-year fixed-rate cash Isa, which offers 2.3% AER. Interest is paid monthly and there's a maximum saving of £250,000.

The Halifax Isa saver fixed five-year account offers 2.25% AER on balances from £500. If you close the account early, you'll lose the equivalent of 365 days' interest.

United Bank UK's five-year fixed-rate cash Isa gives 2.21% AER when you save between £2,000 and £1m. You'll receive the interest on a monthly basis.

What is a savings bond?

A savings bond is a type of savings account, usually offered by banks and building societies. Unlike a regular savings account, which you can access and withdraw money from at any time, a bond usually has a more restrictive contract.

It will either run for a set period - eg a one-year fixed-term bond will run for one year - and you usually won't be able to access the money saved in the bond for that time.

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.