An income bond is a type of savings account that allows you to earn a regular income in the form of interest on your savings. Income bonds are popular with those who have a lump sum in savings and want to use this to generate income, such as many pensioners.
Types of income bonds
There are various types of bonds that will allow you to turn your savings into a source of regular income.
Fixed rate bonds
One of the most popular types of bonds for those looking to earn a return on their savings. Fixed rate bonds offer a guaranteed rate of interest in exchange for agreeing not to touch your money for a fixed period – usually 1, 2, 3 or 5 years.
Interest can be taken monthly, giving you a regular income and the fixed rate means that you know exactly what your income will be for the life of the bond. However, because the rate is fixed the amount you earn will not increase in line with inflation.
It’s also worth bearing in mind that if you need to withdraw your money early, you may be hit with a penalty fee. This is usually calculated based on a percentage of the interest you would have earned on the funds withdrawn.
Monthly income bonds
Monthly income bonds allow you to earn monthly interest on your savings, but unlike a fixed rate bond, you can take your money out whenever you need to. The interest rate you get on a monthly income bond will normally be variable, meaning it will go up and down due to inflation and other factors.
Monthly income bonds tend to offer lower interest rates than fixed rate bonds, but are more flexible as you can access your money when you need it and the income you earn will tend to keep pace with inflation.
