Should Parents Secure their Kids’ Futures with Fixed Rate Bonds?

With interest rates currently in the doldrums and inflation shooting up, it seems a dismal time for anyone who is contemplating putting money aside for their children.

It’s tempting to take out a fixed rate bond in these circumstances, as these often attract higher than usual interest rates and there is a good range of bonds available. But how do fixed bonds compare with other savings products aimed at young savers?

Certainly, the interest rates on fixed bonds are on the whole much more attractive than those offered on ordinary variable savings accounts. Most of the accounts specifically designed for children attract variable interest rates, which are affected not only by the Bank of England’s Base Rate, but also by the need for savings providers to keep competitive. 

With a fixed rate bond, the interest stated at the time of opening the account will be the interest paid throughout its life. Usually, the longer you’re prepared to lock away the money, the higher the fixed rate of interest will be.

Furthermore, if variable interest rates drop, the rate on a fixed rate bond doesn’t. If you want to start a nest egg for your child, you probably won’t be concerned about the fact that the money is being tied up for some time.

The longer the tie in period of the bond, the less flexibility you and the child are going to have when it comes to changing where the money is invested. At the moment, with interest rates so low, a 4% fixed rate of interest looks great and there are accounts at the moment that are offering even higher rates.

But if variable interest rates were to take a turn for the better, 4% might start to look rather disappointing. You might end up regretting that fact that the money has been locked away for five years.

Often, a fixed bond account needs to be started with a substantial sum of money, for example £1000. Also, it is not uncommon for only one initial deposit to be allowed. This sort of arrangement may suit you, especially if you want to set up an investment for a child which you can then effectively leave to do its job. This might be an ideal solution for a grandparent.

With variable interest accounts, you shouldn’t be fooled into thinking that just because an account is aimed at children, it will necessarily offer a good deal. Some of the rates on offer are very low.

One way of securing a more impressive return on money invested is with a regular savings account for children.

With a regular savings account, a minimum amount must be deposited every month. In return, it’s possible to get some very attractive interest rates on accounts for children, perhaps as high as 6%.

But these accounts are not without their restrictions. In some cases, missing a monthly payment will mean a severe drop in the rate of interest paid, in others, the penalty is imposed for making a withdrawal.

Additionally, these regular savings accounts are usually date limited. In these cases, the investment will only attract the high rate of interest for 12 months, after which the account will switch to an ordinary rate of interest that won’t be nearly so impressive.

If you choose a regular savings account for your child, you’ll need to be sure you can make all the monthly payments and that you won’t need to withdraw any of the money for a year. Additionally, you’ll need to stay on the ball.

If you leave the money where it is after a year, it is likely that the interest rate paid will not be competitive. If you’re prepared to look around and move the funds, you will be able to do better, but this requires some effort.

Article written by Sam, journalist at moneysupermarket.com, the number one website for comparing savings accounts. Read here for more about the range of fixed rate bonds currently on offer.

 

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