An ISA is an individual savings account that can give you the chance to earn tax-free interest up to a certain amount. The amount of tax-free interest that you can earn is decided on by the government at the beginning of each tax year.
Most of high street banks offer a number of different ISAs in the UK including:
Cash ISAs or instant access ISAs: If access to your capital is paramount, then cash ISAs or instant access ISAs may be the best option for you. The majority of cash and instant access ISAs allow you to withdraw your capital from the ISA at any time.
Fixed rate ISAs: If you are confident that you will not need your capital in the near future, you could use a fixed rate ISA. Fixed rate ISAs often have better interest when compared to other ISAs; however, fixed rate ISAs do require you to leave your capital for the entirety of the fixed term.
Stocks and Shares ISAs: These types of ISAs allow you to earn tax-free interest on investments. This is because they can be used as a vehicle for stocks and shares.
Lifetime ISAs: These types of ISAs are well suited for long-term saving. The majority of people who open lifetime ISAs are often savings for a deposit for a house or for retirement. Lifetime ISAs are unique, as the government will reward you by adding a 25% bonus, up to £1,000, to your initially invested capital.
Junior ISAs: If you are looking to open an ISA for anyone under the age of 18, then a junior ISA is your best option. It is important to note that all junior ISAs have a lower tax-free interest ceiling.
Fixed rate ISAs
Fixed rate ISAs typically offer some of the best interest rates on the market. In order to access the higher rates of interest, you must be prepared to lock up your capital for the duration of the fixed term.
You can find fixed rate ISAs through the majority of banks in the UK. Generally, UK banks will offer you a choice of fixed rate ISAs between 1 and 5 years.
Some of the best 12 month fixed rate ISAs can be found in our table above.
Fixed rate ISA features
Fixed rate ISAs may be an attractive option for you, especially if you are confident that you do not need to use your capital within the near future.
It should be noted that no two fixed rate ISAs are the same. Depending on the ISA provider, the ISA will have different features.
Below are a number of common features that you will likely find in the majority of fixed rate ISAs.
Qualifying for an ISA...
You must be 18 years old and live in the United Kingdom in order to open any fixed rate ISA
If you do not live in the UK, then it still could be possible to open a fixed rate ISA as long as you are a Crown servant (for example a part of the armed forces, a diplomat or overseas civil servant).
Every fixed rate ISA gives your capital the opportunity to receive tax-free interest over the course of the fixed term.
The government sets the tax-free interest limit at the beginning of every tax year. The ISA allowance currently sits at £20,000.
It is important to note that the tax-free limit £20,000 is not attached to the ISA account, but the individual person.
This means that if you have multiple ISAs, then your ISA allowance will be split up between your accounts.
The golden rule is: Once it’s gone, it’s gone. This means that you cannot save or carry over the tax allowance to the following year, which makes it integral to take advantage of every year.
Fixed rate ISAs offer you the chance to earn not only tax-free interest, but often higher interest than regular ISAs. However, you have to make sure you do not touch your capital for the course of the fixed rate term.
If you are confident that you will not need your capital for a prolonged time, you may want to look into the longer fixed rate ISAs; the longer the fixed rate term, the higher the interest.
All fixed term ISAs will require you to leave your capital for an agreed term. This is because the majority of ISA providers will not allow withdrawals from a fixed term ISA.
Almost every fixed rate ISA providers will prohibit withdrawals from a fixed rate ISA. However, a small number of banks will allow you to withdraw your capital within their ‘cooling off period’ at the start of the fixed term. Typically, an ISA provider’s ‘cooling off period’ will be 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.
Often fixed rate ISA providers will have a minimum deposit that you will need to have before opening a fixed rate ISA.
The minimum deposits found in fixed rate ISAs vary from lender to lender; however, it is not uncommon for fixed rate ISAs to require a deposit between £100 and £2,000.
Even if the minimum deposit is relatively high for the ISA you are looking at, it may still be worth opening, especially if you only have to leave your deposit for a short period of time.
Who can open an ISA
All UK banks that provide fixed rate ISAs require you to live in the UK and be 18 or over.
If you want to open an ISA for someone who is under the age of 18, then you could explore the junior ISA options available on the market.
Who can contribute to an ISA
Typically, fixed rate ISA providers 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) ensures that capital up to £85,000 per person is protected, providing that capita is in an account with an authorised UK bank or building society.
The FSCS’s protection will extend to capital in a fixed rate 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 fixed rate ISA...
If your fixed rate ISA is with an authorised UK bank or building society, then the FSCS protection will cover your first £85,000. The protection means that your initial £85,000 will be returned in the event your ISA provider collapses.
Some banking brands are under the umbrella of the same banking authorisation. Therefore, if you have multiple ISAs with different banking brands, then you should check that they do not share the same banking authorisation.
If you have more than £85,000 in a fixed rate ISA with the same bank (or multiple banks under the same banking authorisation), then not all your funds are protected. It is advisable to transfer your excess to another bank with a separate authorisation to ensure all your capital is fully protected by the FSCS.
The fixed rate ISA checklist
Use our table above to see all the details of the best fixed rate ISA deals. By using our table, you can compare the different fixed rate ISAs and make an informed decision.
When comparing the ISA deals in our table, you may want to consider the following:
Minimum ISA deposits: Fixed rate ISA providers typically have a minimum deposit to open an ISA. Before deciding on your ISA, you should consider whether you can afford the minimum deposit and whether the minimum deposit will put you over your tax-free allowance.
Additional bonus rewards: A number of fixed rate ISAs come with additional bonuses to entice more customers to open an ISA with a specific provider. However, it should be noted that once these bonuses have been paid, the fixed rate ISA provider will drastically drop the interest rate.
How the interest is calculated: The manner in which your interest is calculated and paid will vary depending on the ISA provider. Some ISA providers will offer interest payments monthly, quarterly or annually.
Early closure/ withdrawal penalties: If you are likely to require your capital in the near future, then you should check whether you are able to make a withdrawal from your ISA. Most ISA providers will levy an early closure/withdrawal charge in the event an early withdrawal is made.