Fixed Rate ISA Guide
What are fixed rate cash ISAs?
When it comes to building up a nest egg, squirrelling money away into an individual savings account (ISA) is a complete no-brainer if you are a taxpayer as returns are tax-free.
This tax break is in addition to the new Personal Savings Allowance (PSA), which came into effect on April 6, 2016. All basic rate taxpayers can now earn £1,000 of savings interest a year without having to pay any tax on it. You’re a basic rate taxpayer in the 2016-17 tax year if your income is less than £43,000).
If you’re a higher rate taxpayer, paying tax at the 40% rate on an income between £43,001 and £150,000, you’re entitled to a lower PSA of £500 a year.
If you’re an additional taxpayer earning £150,001 or more, you won’t get an allowance at all.
In the current tax year, you can slot away up to £15,240 in a cash ISA, or a stocks and shares ISA, or an innovative finance ISA, or you can split your allowance between two or three of these.
With rock bottom interest rates, and no sign of any relief on the horizon, it’s well worth considering a fixed-rate ISA – rather than an easy access cash ISA – if you can afford to lock your money away, as the interest rates tend to be higher.
With a fixed rate cash ISA you earn a guaranteed rate of interest for a set period of time – giving you certainty of knowing what the rate will be.
What types of fixed rate cash ISA are available?
Fixed-rate cash ISAs tend to run for a period of between one and five years. The longer you fix for, the higher the returns on offer. But you do need to ensure you can afford to lock your money away for the full term as you can’t usually access your money during the fixed term without incurring a hefty penalty. Some accounts will only allow you to get at your money in exceptional circumstances.
In addition, you need to be wary of fixing for too long, as while rates have been at rock bottom for several years now, they will climb upwards at some point. If your money is tied up for several years, you could risk finding yourself stuck in an uncompetitive account, and missing out when rates do eventually rise.
By contrast, if you opt for a shorter-term fixed-rate ISA, you can reassess the market regularly to check you’re getting the most competitive rate.
In addition, when choosing a fixed-rate ISA, you must not get fixated on the headline rate without looking beyond this to the Ts and Cs that come with the account.
Before opting for one of these accounts, you also need to be happy with the idea of locking away one lump sum payment at the beginning of the term – rather than drip-feeding cash into the account little by little each month.
If you don’t have a lump sum or are wanting an account that allows you to pay money in as and when you can, an easy access cash ISA would be a better option.
Also remember that any funds withdrawn from an ISA account cannot be replaced – unless you haven’t used your full ISA allowance.
What are the advantages of fixed rate cash ISAs?
With a fixed-rate cash ISA, the rate does not change for a set term, meaning you know exactly what you are getting on your money for that period – without having to worry about the rate falling.
Generally speaking, the rates paid are higher than on other accounts because you are tying your money up – and because the provider knows how long they will have your money for.
However, if you would prefer not to lock your money away in a fixed-rate ISA, you need to look at what other accounts are available, weighing up the pros and cons of each before making your decision.
Why should you use MoneySuperMarket.com to compare fixed rate cash ISAs?
Given that there is such a wide choice of savings accounts – and then different types of ISA account within this, it’s vital to do your research.
The best way to do this is by making use of a free and independent online comparison service, such as MoneySuperMarket.
In just a few seconds, you can see all the different types of ISAs and rates available, as well as the Ts and Cs for each account – making it easy to compare deals to find the right one for you.