Fixed Rate Bonds

Bazza_Tommo

Hello,

I did search this topic but didn't really see anything up to date so here goes.....

I am retiring from work at the end of March this year and have also inherited some money. Having been used to relying on a monthly wage to pay my way in the world I now find myself in a position where I am having to work out the best way to make my money work for me each month.

My specific question is one related to fixed rate bonds and if now is a good time to put some money into them?

I am considering a 5 year fixed rate bond which is paying 4.5%. It FSCS protected. So should I:

1. Invest in a fixed rate bond?

2. If so is 5 years a wise thing to do or would say 3 years be better?

3. Or should I do a 1 year bond and then see where the land lies interest rate wise?

I am working on the assumption that interest rates for savers will fall over the coming months/years and that a 5 year rate of 4.5% might be a good bet?

With regards to the money I don't need access to it so locking it up for 3 or 5 years isn't a problem and I am reasonably risk averse so feel that a FSCS protected bond is a safer bet than other forms of investment.

I have never had savings like this before or had to worry about stocks/shares/investments etc. as vitually everything I've earned has gone to paying bils etc. so I am a complete newb with all this stuff.

Thanks

Baz

wmb194

It isn't all or nothing so you could build a 'ladder' e.g., some money in a one year, some in a two, some in a three etc. This way you hedge your bets a bit.

Bigwheels1111

I sold my house, put the cash into 5 and 7 year fixed rate bonds.
Just remember the 85k FSCS protection.
Then only put £81,330 in any one account. Because deposit is protected but not interest as would be over 85k.
£81,330 keeps you £10 under 85k, so everything would be safe.

Depending how much you have inherited, first choice would be Isbank via Raisin 5 or 7 years at 4.5%.
Takes one or two days to set up and pay out.Mine matured on the 15th and was in my Raisin account at 17.00pm
the next day, I then transferred it into my bank, arrived instantly.
Atom pay into your bank, mine was there at 04.00am on the day it mattered.
Interest is paid away every year. Then Atom, 4.5% 5 years paid away.

Here are the best rates today.
https://moneyfactscompare.co.uk/savings-accounts/5-year-fixed-rate-bonds/?quick-links-first=false

I use the interest as my income. 

I kept an emergency fund, this is in an easy access account or three.
I also fund 11 regular savers, this will bring in 1.1k extra interest next year.
They range from 5.5% up to 8%.
My last fixed just paid interest yesterday.
I’m just updating my records, ready for self assessment return as received over 10k interest.

Will you have an income, ie pension. Only ask due to tax implications.
£18,570 can be tax free.
The first £12,570 a year is tax free, made up of pension, earnings or interest.
The next £5,000 if interest is your starter savings rate, and tax free.
The PSA £1000 tax free interest.

If your pension is £15,570 and interest is £3,000.
The tax would be, taken from the starter rate. £5000 - £3,000 earnings, 
The 3k would be taxed so £600 tax.
The 2k interest is still tax free.

£4,000 earnings + £14,570 interest is all tax free.
At the total is £18570.
A bit confusing 🫤 is it not.

Janie2008

No one knows what will happen with interest rates over the next 5 years but my best guess would be a 1 year would mean you would get your money back out at a time rates were lower.  I tend to spread my money over different length bonds so I have some maturing each year.  You could split yours between 3 and 5 year bonds.  It depends how much money is involved also as you need to consider the FSCS protection. 

Bazza_Tommo

Thanks to everyone who has replied so far its appreciated.

A couple of my thoughts are:

1. I like the idea of laddering to spread my bets so to speak but wonder if I do this that I may miss out next year or in 3 years time should rates fall again for savers. As Janie says we don't have a crystal ball when it comes to seeing into the future but do you feel that rates are more likely than not going to continue to fall over the coming years or not and thus the 4.5% rate is a good bet at the moment?
2. Would interest payable at the end of each year (which is how interest is paid by the Raison bond I am considering) go straight into your nominated bank account and thus be outside the £85k intial investment?.
3. I have also read that if interest rates for borrowers goes up interest rates on bonds goes down....that sounds counter intuitive to me  Is this the case???
4. If the above is true then if interest rates fall then savers get a better rate for bonds? I am struggling to get my hear around that and I must surely be wrong?
   

I have to get my head around what interest on savings is tax free and as you say bigwheel its a bit confusing. I'm sure I will get it though.

I do have a small final salary pension and a draw down pot from which I could take 25% per year tax free for the next 7 years until I get my state pension so interest on the inheritance will help a lot with income.

I have enough cash to do two bonds and have money for a rainy day.

All comments welcome and thanks again to everyone who has replied thus far.

Cheers

Baz

eskbanker

Bazza_Tommo said:
I have also read that if interest rates for borrowers goes up interest rates on bonds goes down....that sounds counter intuitive to me  Is this the case???

The confusion here arises from the use of the vague term 'bonds', which has multiple meanings!  If you're meaning the word in the sense of 'fixed rate/term savings account' then these will pay interest based on the provider's expectation of where wider interest rates are likely to be during the term, but bonds can also refer to 'loans to companies', which are a different beast altogether and whose returns aren't correlated to savings interest rates....

Albermarle

 As Janie says we don't have a crystal ball when it comes to seeing into the future but do you feel that rates are more likely than not going to continue to fall over the coming years or not and thus the 4.5% rate is a good bet at the moment?

Due to the lack of the aforementioned crystal ball, then nobody can answer this question.

However the 4.5% offered is less than you get in an easy access account, so this means the savings provider is thinking that rates will drop to some extent over that period. Especially if you take into account that you get a premium rate for tying your money up with them for an extended period.

If it is likely that you will not need some of the money for longer than 5 years, particularly for 10 years, then you could look at investing some of it. 

As this is the last tax year that you will have earned income, it is your last chance to add a significant amount of money to your pension, and still get tax relief on it. For subsequent tax years you can only add a maximum of £2880 pa as a non earner.

Pompeydave1967

I opened a 5 yr fixed with Atom a few days ago , have a few 1 yr / 2 yr as well.
Of course nobody can predict future rates but I’m happy with fixed rate etc.

Bazza_Tommo

Again thanks to those who have responded. Interesting thought re putting a lump sum into my pension.

I guess I have to make some decisions in the coming few weeks

Cheers

Baz

Albermarle

Bazza_Tommo said:

Again thanks to those who have responded. Interesting thought re putting a lump sum into my pension.

I guess I have to make some decisions in the coming few weeks

Cheers

Baz

You can add to a pension gross ( including tax relief) all your earnings in a tax year, unless you are a higher earner where there are some limits.
It would probably be easier to make a lump sum payment to your current workplace pension, but just check with the provider first that it would be OK to do that.
Also do not leave it until the last minute in case there are delays, as once April 6th arrives you will have missed the boat for 23/24.