Fixed-Rate Cash ISAs
Instant access cash ISAs offer savers the benefit of quick and easy access to their money whenever they need it; however, they're not the only cash ISA option available.
Fixed-rate cash ISAs allow you to lock your tax-efficient cash ISA allowance away for a predetermined period at a fixed rate of interest.
Fixed-rate cash ISAs vary in timescale from six months to five years, and generally, the longer you are willing to lock your cash away, the higher the rate will be.
However, it's important to remember that fixed-rate accounts don't necessarily beat the highest rates on offer from more accessible cash ISAs. It's essential to research providers thoroughly before you commit, rather than assuming that a fixed-term ISA will automatically guarantee a superior rate.
Unlike instant access ISAs, fixed-rate ISAs mean that you run the risk of being unable to switch to a provider with preferable interest, at least until you've sat out the fixed term. So, you could find that the attractive fixed rate you started out with begins to look increasingly uncompetitive in comparison with subsequent instant access cash ISA rates.
The fixed term offered by this type of ISA does have the potential to some real advantages, however. As well as the possibility of a good rate of return over the long term, fixed-rate cash ISAs can be a useful way to save for a specific future event. Knowing that you'll be penalised for early withdrawal from a fixed-rate ISA might make you think twice before using the cash for something else.
As with all types of ISA, there are various factors to consider, and the product that's best for you is likely to depend on your individual circumstances.
Things to look out for when choosing a fixed-rate cash ISA
There are a wide variety of fixed-rate ISA account deals to choose from, so we have highlighted some of the features to look out for:
- Minimum ISA deposits - some fixed-rate cash ISA accounts require a minimum level of funding to get started. This can vary widely - from as little as £50 to upwards of £1,000 - so it's important to consider how much money you can realistically afford to tie up for the minimum term required. Once you've placed your minimum deposit, you can then add funds up to the ISA limit, which is £15,240 for 2015/16.
- Additional bonus rates - many fixed-rate cash ISA accounts offer a bonus for new customers, paid at the end of a set period. There are often conditions attached to this offer, and savers should bear in mind that once this special bonus is paid, the ongoing interest rate may not be competitive. Be prepared to switch to a different ISA provider once this period ends.
- Interest calculation method - some ISA providers pay interest monthly, while others do so quarterly or annually. Check this with your provider before opening a fixed-rate cash ISA.
- Early closure penalties - if you close your fixed-rate cash ISA before the term is over, or withdraw money from it, you will face some form of penalty charge. This may be a loss of interest - for example, on a five-year fixed term cash ISA you could lose up to a year's tax-free interest if you close your account early.