A savings bond works similarly to a savings account. You deposit a set amount of money with either a building society, the government, or bank, and after a period of time, you’ll receive some type of interest on the money you deposited.
However, unlike a savings account where you’re able to take funds out whenever you like, with a savings bond, it requires you to lock the deposit. Typically, this is a minimum requirement of something around £1000, but you’re able to opt-in for different bond packages.
In simple words, it’s a fixed-term loan from the user to the bond issuer. People find these inviting because they usually offer a much larger interest rate that is generally found on an everyday savings account. You can find a top-level comparison of a savings account and bond here.
The amount of time you have to lock your money up will depend on your agreement. The longer your savings bond is, the higher percentage of interest you’ll earn.
How Do Saving Bonds Work?
Before making the initial investment in a savings bond, let’s discuss how they work. As mentioned, you’re required to lock your money up for a certain period of time, and the longer your bond is, the higher the interest rate you’ll receive on your deposited funds.
It’s a straightforward concept, and you’ll receive more because the bank can generally invest the money for longer. To open a savings bond, you’ll need access to a lump sum of money to be accepted. The minimum requirement will differ between bond issuers, but you can expect it to be around the £1000 mark.
These are the key takeaways on how a saving bond works are:
- You’re required to invest a lump sum of money before being able to open a savings bond (typically around £1000, but different bond packages are available).
- Your money will be locked up, and you won’t be able to access this without paying a penalty charge. This charge will widely depend on the issuer’s policy.
- The longer you invest your money, the higher the interest rate you’ll receive on your savings bond.
How Long Do Savings Bonds Take to Mature?
It’s estimated that it takes 20 years for a savings bond to fully mature. However, some may reach this maturity way before 20 years, depending on their fixed interest rate. Once you’ve created a savings bond, they’ll have all your information, and when it comes close to the time of your bond maturing, they’ll notify you.
Most bond issuers will write to you approximately one month before your bond matures. Within this letter, they’ll ask you questions like “where would you like your bonds deposited”, “would you like to transfer your matured bonds into another account”, etc.
Again, depending on your bond issuer, if they don’t hear back from you when your bond matures, they’ll generally open variable rate savings account on your behalf. They’ll then try to contact you another time with the details on how you can access your matured funds.
As you can see, savings bonds can be a great way to lock your money away for a long time and receive a great interest rate. If, however, you want to save for your first house, you may want to consider a lifetime ISA instead. If you want to save money for when your child reaches 18, we would suggest a Junior ISA.
James Banerjee is an Account Director who graduated from the University of Kent in 2014. He works in SEO on clients such as HSBC UK and Nestle and he has a keen interest in personal finances and money-saving advice.