If you already have this sum to hand (or at least a large chunk of it) and don’t need access to your cash in the near future, then look at a fixed rate ISA as this is where the highest interest rates can be found.
ISAs that pay a competitive fixed rate of return, however, also require that you surrender access to your cash for the term of the fix, in which case many savers will only be comfortable with a one-year deal. But there’s no time to waste as the sooner you can pay the funds in, the sooner you will start earning the tax-free interest.
What’s the deal?
If you want to tie up your money for just one year, Santander is paying the market leading fixed rate over this timeframe of 3.50% AER in return for a minimum £2,500 deposit. However, as the account accepts transfers in, you can also choose to move the same minimum sum across from an existing ISA with another provider. Cash ISA transfer application forms must be received within 14 days of the account being opened.
Santander’s one-year fixed rate ISA matures on May 1, 2013 when the interest will be credited directly into the account. After that date, the account reverts to a variable rate cash ISA, which will pay a maximum 0.50% AER tax-free. In other words, it will be time to move your money.
There are no catches to this deal as such as the rate you see is the one you get for the agreed 12 months. However, if you only pay in the required minimum of £2,500 to open the account, you will not then be permitted to make any additional deposits to top up to your maximum £5,640 ISA allowance.
Partial withdrawals are not allowed during the fixed rate term and, while you will be able to access all of your funds by closing the account down entirely, this will see you subject to an early closure charge equivalent to 90 days' interest. In this case, you would have been better off with a lower-paying easy access ISA.
What’s the verdict?
If you have existing savings but are likely to need them in the not-too-distant future, Santander’s one-year fixed rate ISA is perfect. Not only will it pay the best rate on the market free of tax but, as your money is effectively tied up for a year, it could provide welcome discipline for savers who may otherwise be tempted to dip into their cash.
But it follows that if you can stretch to two years, higher ISA rates are available. For example, BM Savings is offering a rate of 4.05% AER tax-free if you are willing to tie up your money for two years. This requires a £500 minimum investment.
You may earn even more than this with Santander’s two-year MAJOR fixed rate ISA. While this only offers a guaranteed tax-free rate of 4.00% over this timeframe, it will pay an additional 0.10% in the event that Rory McIIroy wins an eligible golf major. This ISA also requires a minimum investment of £500.
If you are considering tying up your money into a fixed rate ISA, do it sooner rather than later. The clock started ticking from April 6 so the longer you hold off, the more market leading tax-free returns you will be missing out on.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.