Term deposits: at a glance
- What do I need to know? Term deposit accounts offer predictable returns over a set period, letting you calculate exactly what you’ll earn.
- What does it mean for me? The longer you agree to lock your money away, the more interest you’re likely to earn.
- Why does it matter? Fixed returns can help you protect and grow your cash, though you may have less flexibility to respond to unpredictable changes.
A healthy savings portfolio allows you to balance your cash for short-term spending, while growing your funds for long-term goals. It can be tough to manage both objectives, especially when inflation and interest rates are unpredictable.
In this guide, you’ll learn how term deposit accounts work and when they could be a valuable addition to your wealth strategy.
What is a term deposit account?
Term deposit accounts offer set interest rates in exchange for locking your cash away for a predetermined time. They’re also known as fixed-term accounts or fixed-rate savings.
Generally, the longer you lock your money away, the higher interest you can expect to earn. Many term deposit accounts are fixed for one to five years, designed for medium-term savings goals. Although, terms can sometimes last up to 10 years or more.
How do they work?
Term deposit accounts are usually considered low-risk and can provide appealing returns, especially those with competitive rates. You’ll receive a fixed interest rate that is typically higher than those offered with instant access accounts.
A fixed rate means you’ll earn the same return regardless of how other interest rates change. This can help you anticipate your final earnings, but might limit your potential earnings if rates rise.
Since the interest rate is fixed for the duration of your term, you know exactly how much you’ll receive once it ends, so you can manage your finances with confidence.
Why do some savers prefer term deposit accounts?
Fixed-term deposits can be useful if your income covers your spending and short-term savings goals. For example, if you’re lucky enough to receive a significant lump sum, you could use multiple savings accounts paying high interest to turn your funds into passive income.
This is because you can leave some of your funds in instant access accounts in case of emergencies, while leaving the rest to maximise your returns in a fixed-term deposit account.
Term deposit accounts can also be useful if you’re saving towards a specific, long-term goal. This might include saving money for your children’s future, as a greater number of parents in the UK intend to do.
Once your term ends, you can withdraw or reinvest your increased cash sum. Fixed terms can discourage impulsive spending. You won’t be able to dip into your money whenever you want, but it will be earning interest in the meantime.
Term deposits vs. instant access savings accounts
Let’s compare the benefits and drawbacks of term deposit accounts and instant access savings.
| Account type | Pros | Cons |
| Term deposit account |
|
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| Instant access savings account |
|
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When it comes to saving, it’s important to consider what you want to prioritise. For example, you might choose a greater emphasis on instant access accounts to respond to new investment opportunities as they arise.
A combination of fixed-term and instant access accounts means that you don’t have to limit yourself to one approach. Instead, you can decide how to balance your cash for the peace of mind that comes with easy access, in addition to the security of predictable returns.
How much could you earn from a term deposit account?
Your potential earnings from a fixed-term deposit depend on the term duration, deposit amount, rate, and whether interest is compounded annually. Interest rates often increase the longer the agreed term.
For example, here’s how much you could grow a £50,000 investment in a two-year term deposit with a 4% AER (Annual Equivalent Rate), which accounts for compound interest:
| Year | Starting balance | Interest earned (4%) | End balance |
| 1 | £50,000 | £2,000 | £52,000 |
|
2 |
£52,000 |
£2,080 |
£54,080 |
Are term deposit earnings taxable?
Yes, if you earn more interest than your annual allowance. Additional rate taxpayers don’t qualify for the Personal Savings Allowance (PSA) at all.
So, HMRC will tax all your interest earnings if you fall within that tax bracket, unless you earn interest on a deposit in an ISA (Individual Savings Account).
Are term deposits FSCS protected?
Yes, if your account provider is covered by the FSCS (Financial Services Compensation Scheme), your money is insured up to £85,000 per individual, per financial institution. This means you will be reimbursed up to this limit if your bank were to fail.
All term deposits and savings accounts with Flagstone are FSCS protected.
If you’d like to deposit funds above this limit into your savings accounts, spreading your wealth across different banks and accounts can protect more of your cash.
What are the penalties for early withdrawal from term deposit accounts?
Not all term deposit accounts allow you to withdraw your money early. This means once you fund the account, you’ve locked your money away until the end of the term.
Accounts that do let you withdraw early will most likely charge you a fee or penalty. The exact penalty will vary depending on the terms and conditions you agreed to when you opened the account.
You might lose some or all of the interest you’ve earned in the account so far. The bank may also charge you a penalty fee for early withdrawals.
Frequently asked questions about term deposits
What are the minimum and maximum funding amounts for term deposit accounts?
It depends on the rules that apply to the account you open. Some institutions don’t specify a maximum deposit for fixed savings. Others do set limits for significant deposits. It’s usually advisable to check the details before you open the account.
Minimum funding requirements are more common for term deposit accounts. But this is also dependent on the financial institution in question, and the rules they specify for each of their accounts.
Is it worth putting money in a term deposit?
Term deposits can be a valuable part of a balanced portfolio. Though there are downsides to locking your money away for long periods of time, beyond losing easy access to your cash.
Instant access accounts may give you the flexibility to move your money to take advantage of better rates when they arise. But term deposits provide you with predictable returns in uncertain times.
When you combine multiple types of accounts, your savings are better positioned to maintain their value despite inflation.
Protect your purchasing power
Term deposit accounts can be a valuable addition to your wealth management strategy.
By limiting instant access to some of your funds, you can lock in a predictable interest rate for years at a time. This can help you anticipate the growth of your cash, though you may be less prepared to respond if market conditions change.
Grow your savings with fixed-rate, high-interest term deposits
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