Term deposit or fixed-rate bonds offer a lot of benefits for savers but come with certain limitations too. Find out whether they are the right option for you in this post. Keep reading.
Popularly known as a fixed-rate bond, a term deposit allows savers to grow their savings by earning interest at a fixed rate throughout the tenure. They can be opened for a duration ranging between 6 months to 5 years. Let’s look at their pros and cons and if they make sense for you.
Advantages of Term Deposit
- Deposit in GBP or USD: This is one of the few fixed-rate deposit accounts in the UK that you can open in both GBP or US dollars. In fact, some banks offer a slightly higher AER (Annual Equivalent Rate) on US dollar deposits, making it an excellent option for individuals to park their dollar earnings.
- Fixed Interest Rate: The best advantage of a fixed-rate bond is that the interest rate on the deposit made remains fixed during the entire tenure. Market conditions do not impact the interest rate. This can help individuals know their earnings in advance. Moreover, it provides a guaranteed return. This feature makes it slightly better than the ISA (Individual Savings Account) deposit, where the interest rate is variable.
- Flexible Tenure: Individuals can deposit their savings for a period as low as 6 months or as high as 5-years. The low tenure option makes it easy for people to park their unutilised savings and earn interest while providing them access to the funds after completing the tenure without any penalty.
- FSCS Protected:Financial Services Compensation Scheme (FSCS), a UK government body, ensures your deposits into a UK-regulated bank is secured and insured up to a total of £85,000 per financial institution. This limit is for a single individual. Thus, if you hold a joint account, then the limit of protection is £170,000 for all the deposits held jointly in a bank.
- Great for Short-term or Mid-term Goals:Term deposit is a great way to save towards achieving a short-term to a mid-term goal. Whether it is buying a new car or planning for a vacation, you can open an account as an individual or jointly with your spouse or partner and work towards building a corpus that offers fixed earnings.
Cons
- Interest Rates Can’t Rise During the Period: One of the limitations of a fixed-rate bond is that the interest rates cannot increase during the period even if there is an increase in the interest rates generally. However, you can opt for a shorter tenure duration and renew your deposits if you feel the interest rate might rise in the future.
- Access of Funds: Another limiting feature of a fixed-rate bond is that you cannot access funds easily. If you do have to, then you may have to let go of the interest or pay the penalty or both. Some banks offer only to impose a small fine on the interest earned for the period deposit is maintained. Opt for a bank that offers a low penalty on the interest earned. However, note that some types of fixed-rate bonds cannot be withdrawn prematurely unless it is an extreme situation. Such deposits usually offer a higher rate of interest as well.
Is it Right For You?
Term deposit can be excellent for you if you have a lump-sum that you can put away for a pre-defined duration. Moreover, they can help you achieve your short-term or mid-term financial goals, such as planning a vacation or buying a car. A fixed interest ensures you know your earnings, making it easy to plan your immediate and near-future finances.