A fixed rate bond is a type of savings account which lasts for a set period of time, during which the interest you earn does not change even if the Bank of England base rate does.

As you typically wont be able to access your cash during the term, returns on fixed rate accounts tend to be a lot higher than those offered by easy access accounts. And you will also have peace of mind that this higher rate wont change.

Fixed rate bonds typically last for between one and five years and the longer you are prepared to tie up your cash, the higher the interest rate will be.

Tying up your savings

If you have to make a withdrawal within the term you signed up for, you will be charged a penalty, usually in the form of forfeiting interest on your savings.

Fixed rate bond providers often taper the size of this penalty downwards as the term of the bond progresses but then in the first 12 months you may not be able to access your cash at all.

So the message is clear; dont opt for a fixed rate account if theres any chance youll need your money during the account term. And always read the small print carefully.

Who are fixed rate bonds suitable for?

If you have a lump sum perhaps a bonus from work, proceeds of a house sale or even an inheritance which you wont need access to for some time, a fixed rate bond is likely to be your best bet.

Fixed rate bonds typically last for between one and five years – and the longer you are prepared to tie up your cash, the higher the interest rate will be.

Most accounts dont allow you to add to them once youve made your initial deposit, so pay in as much as you can afford when opening the account.

A lot of fixed rate bonds also require a high minimum deposit to open, say, 1,000. So if you only have a small sum to invest, this kind of account may not be the best option.

As youd expect, the highest returns typically go to those who are prepared to tie up their savings for longest. If this is only 12 months, its worth checking how rates compare with those offered by easy access accounts. If theres little in it, it might be worth opting for an easy access account instead and giving yourself the option to make withdrawals whenever you want.

Can I save into a fixed rate account tax-free?

Yes, if you go for a fixed rate NISA (New ISA). Fixed rate NISAs operate in exactly the same way as any other fixed rate bond, except returns are free of income tax. Since July 1, you can save up to 15,000 in cash into one of a fixed rate NISA for the current tax year (2014/2015).

But if you open a fixed rate bond outside a NISA, then you will have to pay tax on your returns at your marginal rate.

How long should I fix my savings for?

How long you fix your savings for all depends on what your ultimate goal is. For example, if you are saving towards a deposit to buy your first home and will need the money next year, a one-year bond will be your best option.

If, however, you expect interest rates to remain low for some time and youre not in any rush to get your savings back, you may want to lock into a longer-term bond.

But bear in mind that if you opt for, say, a five-year bond and interest rates start climbing you could find yourself trapped in an account that is no longer competitive.

Thats why many savers opt for shorter-term one or two-year bonds, because if interest rates rise, you arent locked in for too long.

Finally, always check what happens to your savings once your fixed rate bond finishes. Often your money will be rolled over into another similar account but equally it could be transferred to a low-interest paying easy access account. If this is the case, make sure you move your cash as quickly as possible after your fixed rate bond matures.

Fixed rate bonds — Maximise your savings by fixing — featured accounts — ordered by term then rate (AER)

Vanquis Bank

Interest rate (AER) 2.61% Fixed Min/Max opening amount 1,000 to 250,000 Notice / Term Term: 4 year bond Account type Fixed Rate Bond Access Internet Post Telephone In Branch