When it comes to growing your savings, both fixed rate bonds and cash ISAs can be strong contenders. Each offers unique benefits to help you reach your financial goals, but choosing the right one depends on how you’d like to save.

Finding out how these accounts differ and work could be the first step to help you in figure out which option best suits your saving plans.

An Individual Savings Account (ISA*) is a type of savings account that allows you to save up to £20,000 each year tax-free, with this allowance resetting annually on 6 April. At Coventry Building Society, we offer a range of different ISAs that can give you different ways to grow your savings. We have easy access ISAs and fixed rate options available. We also have our Junior Cash ISA to help keep your children's cash stashed away until they reach 18, and our Additional Allowance ISA for those who've inherited extra ISA allowance.

Find out more about our cash ISAs.

A fixed rate bond allows you to keep your savings stored for a set term, usually between one and five years, with interest rates that are guaranteed for that period. Unlike a cash ISA, a fixed rate bond doesn’t benefit from the ISA tax-free allowance, but this also means there is no £20,000 annual contribution limit. With a fixed rate bond from Coventry Building Society, you can deposit anything from £1 up to £250,000. 

Explore our fixed rate bonds.

Cash ISAs come with some advantages, especially if you're looking to grow your savings tax-free.

• Tax-free interest: one of the biggest perks is that all the interest earned in a cash ISA is completely tax-free. This means you won’t need to worry about any earnings affecting your Personal Savings Allowance (PSA), which is particularly beneficial if you’re a higher or additional rate taxpayer, as your PSA is typically lower or nil. The tax-free nature of these accounts means you keep more of the interest you earn on your money.
• Flexible access: many cash ISAs are easy access, letting you withdraw and sometimes even redeposit funds within the same tax year without losing your tax-free allowance. This flexibility means you can make adjustments if you need to access your savings.
• Variety of options: there’s also a variety of options beyond flexible products. This includes easy access ISAs which offer all the tax-free advantages of an ISA but allow unlimited access to your money, as well as fixed rate cash ISAs where your money is stored away for a set period of time, but benefits from an interest rate that doesn’t change. With so many different products to choose from, there’s an opportunity to find an account that gives you the flexibility you need, and which suits your interest rate preferences.

However, cash ISAs do have some limitations that are important to consider. These include:

• Withdrawal restrictions: if you choose a fixed rate cash ISA, you might face withdrawal restrictions, with penalties often applied for withdrawing savings.
• Interest rates: while fixed rate cash ISAs are available, other cash ISAs come with a variable interest rate that can rise or fall. If the interest rate rises, this could mean you earn more on your savings than you might have expected when you opened the account, but if rates fall your money won’t grow as quickly.
• ISA allowance limits: the ISA allowance allows you to save up to £20,000 a year and earn interest on these savings free of tax, but this also means you can’t deposit any additional savings over this amount in a single tax year. 

Fixed rate bonds, on the other hand, offer a different set of benefits and trade-offs, primarily geared toward savers who value certainty in an environment where interest rates are changing and who don’t mind putting away their funds for a set period.

• Certainty and predictability: fixed rate bonds also offer certainty and predictability – once you lock in your interest rate, it remains the same for the entire term, regardless of fluctuations in the market. This can be reassuring, especially if you’re aiming for steady growth and prefer to avoid the ups and downs of variable interest rates. It could also be beneficial if you want to have monthly interest paid into your current account as part of a guaranteed income.
• A structured approach to saving: for many, the structured nature of fixed rate bonds can be a helpful tool in reaching long-term savings goals. Because of the restrictions on withdrawals, you might be less tempted to dip into your funds, making it easier to stay on track with your savings plan.
• A high deposit limit: while ISAs benefit from a £20,000 tax-free allowance, you cannot deposit more than this amount within a single tax year. Any earnings on a fixed rate bond come under the smaller Personal Savings Allowance, but you can deposit up to £250,000 in savings.

Despite these advantages, there are also some important aspects to consider about fixed rate bonds:

• No access to funds: typically, savers cannot access their funds with fixed bonds without facing penalties. This lack of flexibility means they might not be the best option for some savers who need their money to be readily available in case of emergencies.
• Limited paying in time: fixed rate bonds often require you to deposit your savings when you open the account, either within 14 calendar days of your account being opened or while the account is open to new investors, whichever period is longer. This means you might not be able to make additional contributions if you’re planning to save regularly.
• No flexibility for interest rate changes: once you’ve chosen a fixed rate bond, you cannot benefit from potential increases in interest rates during the fixed term.

Ultimately, choosing between a cash ISA and a fixed rate bond comes down to what best suits your individual savings goals and preferences. If flexibility and access to your funds are your priorities, cash ISAs, particularly easy-access options, offer tax-free interest and allow for adjustments when needed. However, if you’re comfortable with a longer-term commitment and want certainty of returns, fixed bonds or even fixed rate cash ISAs could be a reliable choice. Both options can be valuable tools for growing your savings, so it’s worth considering which approach aligns with your personal financial plans. If you’re not sure which product meets your needs, consider speaking to a professional financial adviser for guidance.

*Interest on ISAs is paid tax-free, that is without tax deducted. ISAs are a savings scheme initiated by the government, and are subject to change by them. For example the favourable tax treatment may not be maintained.