ISAs, also known as individual savings accounts, are savings accounts that provide you the opportunity to earn up to a certain amount of tax-free interest. The ceiling of tax-free interest is set by the government at the beginning of the tax year.
Most of high street banks offer a number of different ISAs in the UK including:
Cash ISAs or instant access ISAs: These ISAs could be an attractive option for you if you want to earn interest and need easy access to your capital. The majority of cash ISAs or instant access ISAs enable you to withdraw from your capital at any time.
Fixed rate ISAs: These ISAs often offer a higher amount of interest than other ISAs, but also require you to tie up your capital for an agreed time period. Banks usually offer fixed rate ISAs between 1 and 5 years.
Stocks and Shares ISAs: These types of ISAs could be an attractive option for you, as theycan be used as a vehicle for stocks and shares; they give you the opportunity to receive tax-free returns from your investment.
Lifetime ISAs: These ISAs are geared towards long-term savings. They could be ideal for you if you are looking tosave for a deposit for a house or for retirement. In addition, the government will add an additional 25% bonus, up to £1,000, to your initially invested capital.
Junior ISAs: These ISAs are specifically designed to cater for the financial needs of anyone under the age of 18. It is important to note that all junior ISAs have a lower tax-free interest ceiling.
12 month fixed rate ISAs
Fixed rate ISAs require you to lock up your capital for an agreed fixed term. If you are confident that you will not need your capital within the next 12 months, then you may want to consider your 12 month fixed rate ISA options. You can find 12 month fixed rate ISAs through the majority of banks in the UK.
Some of the best 12 month fixed rate ISAs can be found in our table above.
12 month fixed rate ISA features
The 12 month fixed rate ISAs on offer will differ from ISA provider to ISA provider. However, there are a number of common features that you will likely find in the majority of 12 month fixed rate ISAs.
Qualifying for an ISA...
If you want a 12 month fixed rate ISA, you will need to live in the United Kingdom and be over the age of 18.
You may still be able to open a 12 month fixed rate ISA if you are living outside the UK, providing you are a Crown servant (for example a part of the armed forces, a diplomat or overseas civil servant).
12 month fixed rate ISAs give your capital the opportunity to receive 12 months’ worth of tax-free interest.
The tax-free interest ceiling is decided on by the government and reviewed at the beginning of every tax year. The ISA allowance currently sits at £20,000.
The tax-free limit is attached to each individual and not the ISA account itself. This means that your ISA allowance will be split up between your accounts if you open multiple ISAs.
It is important to fully use your tax allowance every year. This is because the ISA allowance cannot be 'saved up' or carried over into the next tax year. Therefore, you should take full advantage of your tax allowance, as once it is gone it’s gone.
A feature that you may find attractive is that 12 month fixed rate ISAs often provide higher rates of interest than regular ISAs. So if you do not touch your capital over the course of the 12 month span, you could see your capital grow quickly.
Before opening an ISA, you need to be confident that you will not need to make a withdrawal throughout the 12 month fixed term. This is because ISA providers will not allow you to withdraw your capital once you have made the deposit.
The majority of 12 month fixed rate ISA providers do not allow you to make withdrawals. However, there are a number of banks in the UK that have a grace period or ‘cooling off period’ at the start of the fixed term; these cooling off periods are usually up to 14 days from opening the ISA.
The majority of 12 month fixed rate ISA providers will charge an early withdrawal fee/ early closure charge in the event a withdrawal is made before the end of the fixed term. This is because ‘cooling off periods’ do not come with every ISA.
Early withdrawal fees and early closure charges are often calculated on a number of days’ worth of interest, which means they can substantially reduce your initially invested capital.
Generally to open a 12 month fixed rate ISA, you will need to satisfy the ISA providers’ minimum deposit. It is not uncommon for 12 month fixed rate ISA providers to have a minimum deposit between £100 and £2,000; minimum deposits will vary from provider to provider.
A 12 month fixed rate ISA may still be a good option for you, even if the minimum deposit is relatively high, as you only have to commit the capital for 12 months to enjoy higher tax-free interest.
Who can open an ISA
If you want to open a 12 month fixed rate ISA, then you must be over the age of 18 and living in the UK.
You may be looking for an ISA for someone under the age of 18. If this is the case, then a regular junior ISA may be more appropriate.
Who can contribute to an ISA
The majority of ISAs do not have any restrictions in relation to who can contribute to your ISA. This means that parents, extended family members or even friends can add to your ISA to help your capital grow.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) guarantees the return of up to £85,000 per person, providing the capital is in an account with an authorised UK bank or building society.
The FSCS’s protection will extend to capital in an ISA; however, the extent of the protection will be determined by how many ISAs you have and how much capital you have in them.
FSCS protection for a 12 month fixed rate ISA...
The FSCS protection will cover your first £85,000, so long as the ISA is with an authorised UK bank or building society. The protection means that your initial £85,000 will be returned in the event your ISA provider collapses.
You may have multiple ISAs with different banking brands. If this is the case, then it is integral that you check that they do not share the same banking authorisation; some banking brands are under the umbrella of the same banking authorisation.
If you have more than £85,000 in a 12 month fixed rate ISA with the same bank (or multiple banks under the same authorisation), you can still protect your entire funds. By transferring the excess to another bank with a separate authorisation, you can ensure all your capital is fully protected by the FSCS.
What to look out for in a 12 month fixed rate ISA
See our table above for all the details of the best ISA options. You could use our table to help you compare the ISA deals on offer and find the one that is best suited to your set of circumstances.
When comparing the ISA deals in our table, you may want to consider the following:
Additional bonus rewards: Some ISAs draw you in with enticing bonuses and rewards for opening an ISA with a specific provider. It should be noted that these rewards that come with the ISA rarely come without terms and conditions. For example banks will usually reduce their interest after the reward has been paid. Therefore, if you choose the ISA based on the additional bonus rewards, then be prepared to accept a lower amount of interest.
Minimum ISA deposits: Most 12 month fixed rate ISA providers will have a minimum deposit to open an ISA. It is important to take into account the size of the minimum deposit. You should review whether you will need your capital in the near future, if you can afford the minimum deposit and whether the minimum deposit will take you over your tax-free ISA allowance.
Early closure/ withdrawal penalties: Make sure you know whether you can access your capital. The majority of ISA providers will prohibit withdrawals from their ISAs and levy an early closure/withdrawal charge in the event an early withdrawal is made.
How the interest is calculated: The way that your interest is calculated and paid will differ depending on the provider. For example some ISA providers will offer interest payments monthly, quarterly or annually. It may be worth checking how the interest is calculated and how often interest payments are made when choosing an ISA.