New ‘market-leading’ 7 year savings account fixed at 4% launched – but is it any good?

Skipton Building Society launched a rare 'market-leading' 7-year fixed-rate savings bond with a 4% interest rate earlier this week. It's one of the very few providers on the market to provide a fixed-rate bond for seven years. Most providers limit their bonds to five years. The fixed rate bond is also market-leading in its space; its relatively few competitor products all offer rates under 4%.

Fixed-rate bonds are attractive to savers happy to lock their funds away for the term in exchange for a fixed interest rate that can't change. In the case of Skipton Building Society, you'll receive a 4% interest rate on your funds for the full 7 years, but you won't have access to those funds.

The thing to remember with fixed rate bonds, however, is that tax may be due on the interest in some cases and in particular if you wait 7 years to access it. We explore the tax implications, eligibility criteria, and whether this savings account is right for you below.

Who is Skipton Building Society's 7-year fixed rate bond for?

Fixed-rate bonds work great on the whole if you like certainty. But, you can't access your funds at all, which can be a downside for some. For others, it's an added perk as it keeps the money locked away so they're not tempted to spend it.

Skipton Building Society's 7-year fixed rate bond could be an option for you if you:

• Have at least £500 to deposit but less than £50,000
• Are happy to lock your funds away for the duration of the fixed term (i.e. 7 years in this case)
• Want a fixed interest rate that can't change during the term
• Are at least 16 years old

If you deposit £1,000 into your account, you will receive £1,315 at the end of the fixed term, assuming that you opt to add the interest to the account rather than receive it and you opt to have the interest paid annually.

At the end of the term, you'll be contacted to ask what you want to do with the funds. If Skipton Building Society doesn't hear from you, the bond will be automatically transferred into a new 1-year fixed rate bond.

What are the tax implications of a fixed-rate bond?

With Skipton Building Society's 7-year fixed rate bond, you have a choice as to how you'll receive your interest. You can have the interest paid into a different account on a monthly or annual basis, or you can have the interest added to the initial balance, meaning you'll be able to access it at the end of the term. The first option gives you a monthly or annual income, whereas the second option allows you to accumulate your interest over time. However, there are tax implications with both decisions.

If you choose to have the interest you earn on your balance paid out into a different account, you may need to pay income tax on the amount above your personal savings allowance. This is typically £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. The personal savings allowance is the amount of interest you're allowed to earn on your savings outside of tax-efficient wrappers such as ISAs before tax is due. This tax is paid on the amount of interest you've earned in a specific financial year.

If you choose to keep the interest you earn on your balance deposited for the full duration of the term, you'll only have the interest you've accrued paid out at the end of the term. At this point, you'll need to pay tax on the total amount of interest earned, which could be quite a lot, particularly if you deposited the full £50,000, as the interest earned would be in the region of £15,000.

If you're worried about taxation and you want to find out more, we recommend you take a look at our article on the personal savings allowance and how you can boost it by £5,000 in some cases.

Is Skipon Building Society's 7 year-fixed rate bond market leading?

Skipton Building Society's 7-year fixed rate bond is technically market-leading in its space. Our research suggests it offers a higher interest rate than other 7-year fixed-rate bonds on the market currently. However, 7-year fixed-rate bonds are rare, and we could only find a handful of other providers who offered similar products. Shawbrook, for example, offers both a 7-year fixed rate bond (3.62% AER) and a 7-year fixed rate cash ISA (3.56%). Note, even though the cash ISA offers a lower interest rate, it is a tax-free product and could, therefore, be more attractive to some savers.

Most providers stick to 1 to 5-year fixed-rate products instead. If a 5-year fixed rate product is a long enough commitment for you, there are definitely better rates to be had. Birmingham Bank currently offers a five-year savings account with a 4.43% interest rate, for example. Check out our overview of the best fixed-rate bonds on the market right now if you want to take a look at other choices as well.

Is the Skipton Building Society 7-year fixed rate bond right for you?

The Skipton Building Society 7-year fixed rate bond could be right for you if you're happy to lock your funds away for at least seven years and if the 4% interest rate on offer works for your needs.

It might be the right choice, for instance, if you're looking to earn a decent rate of fixed interest on money you want to lock away for several years. This could be because you're saving up for a house or for another goal in the future. If you have a lump sum you want to deposit, this fixed-rate bond is a great way to keep the money locked away so you can't access the funds if you're tempted, while also earning a decent interest rate. Of course, you'll need to take into account taxation as we discussed.

But even if you're locking away the full £50,000 in hopes of earning a little extra income each year, it might still work, particularly if you're already making use of your ISA allowance in other ways. Locking away the maximum amount allowed will yield roughly £2,000 per year in interest before tax, and the amount of tax you'll pay will depend on your income level as we explained. This could be a decent boost for some.

There are certainly circumstances where this fixed-rate bond works well. However, it's worth exploring tax-efficient fixed-term options before you opt for a savings product that could come with a tax burden. Market-leading five-year fixed-rate ISAs currently come with interest rates above 4% and allow you to earn interest tax-free. Take a look at the best fixed-rate cash ISAs on the market right now for our most recent round-up. Fixed rate bonds, like the one by Skipton Building Society, are decent options if you've already used up your £20,000 ISA allowance for the financial year, but otherwise they could result in an additional tax burden.