ISAs
The majority of banks in the UK offer a wide range of individual savings accounts, also known as ISAs. ISAs may have many advantages over other accounts, but their main strength is their ability to earn a certain amount of tax-free interest, set by the government each year.
There are plenty of ISA accounts available in the UK.
Cash ISAs or instant access ISAs...
Cash ISAs or instant access ISAsenable you to make unlimited withdrawals from your account. This kind of ISA may be ideal for you if you are likely to use your savings in the near future.
Fixed rate ISAs...
Fixed rate ISAs require you to tie up your capital for the entirety of an agreed period of time.
Stocks and Shares ISAs...
You can use an ISA as a vehicle for stocks and shares. You may find this an attractive option, as up to a certain amount of your returns from the stocks and shares would not be subject to tax.
Lifetime ISAs...
Lifetime ISAs are geared towards saving to buy a house or putting money aside for retirement. The main attraction to opening a lifetime ISA is that the government will add a 25% bonus to your initially invested capital. The government are not prepared to contribute more than £1,000 per year to a lifetime ISA.
Junior ISAs...
There are ISAs that are designed for younger savers. Junior ISAs can be opened for anyone under the age of 18. It should be noted that all junior ISAs have a smaller tax-free interest ceiling.
2 Year fixed rate ISAs
If you are prepared to lock up your capital for 2 years, then a 2 year fixed rate ISA may be a good option for you. Not every bank in the UK will offer a 2 year fixed rate ISA, but there are many 2 year fixed rate ISAs available in the UK.
Some of the best 2 year fixed rate ISAs can be found in our table above.
2 year fixed rate ISA features
Every 2 year fixed rate ISA will differ depending on the ISA provider. However, there are a number of common features that you will likely find in the majority of 2 year fixed rate ISAs.
Qualifying for an ISA...
To qualify for any 2 year fixed rate ISA, you must be over the age of 18 and live in the United Kingdom.
If you are living outside the UK, you may still be able to open a 2 year fixed rate ISA, providing you are a Crown servant (for example a part of the armed forces, a diplomat or overseas civil servant).
Tax-free limit...
All 2 year fixed rate ISAs will give you the chance to receive up to a certain amount of tax-free interest. The ceiling for tax-free interest is reviewed and set by the government each year. The 2018/19 ISA allowance is £20,000, and will likely remain the same for the 2018/19 tax year.
It is important to note that the tax-free limit is allocated to each individual, not to each individual ISA. Therefore, if you open multiple ISA accounts, your ISA allowance will be split between your accounts. In addition, the allowance cannot be 'saved up' or carried over into the next tax year.
Higher interest...
2 year fixed rate ISAs typically offer higher rates of interest than shorter fixed rate ISAs or regular ISAs. This means that if you want to access better interest and let your capital potentially grow, then a 2 year fixed rate ISA might be a good option for you.
Limited access...
To benefit from the higher rates of interest that 2 year fixed rate ISAs offer you must be prepared to leave your capital for the duration of the fixed term. 2 year fixed rate ISA providers will often prohibit withdrawals for the entirety of the 2 year term.
Cooling off period...
Depending on the provider, you may find a 2 year fixed rate ISA that allows gives you a bit of wiggle room with respect to your deposit.
You may find an ISA with a cooling off period, which gives you the option to amend or completely withdraw your initially invested capital within a certain number of days.
Typically, ISA providers with a cooling off period will only allow you to withdraw your funds within the first 14 days of opening the ISA. It is important to note that not all fixed rate ISAs will have a cooling off period and you should always check with your provider before opening an ISA.
Early withdrawal fees/ early closure charges…
Some 2 year fixed rate ISA providers offer the option to make withdrawals after their cooling off period; however, this is rare and will usually come with an early withdrawal fee/ early closure charge.
Early withdrawal fees and early closure charges can be substantial; they are often a number of days’ worth of interest and, depending on how long your capital has been in the ISA, you could receive less than you initially invested.
Minimum deposit...
The majority of 2 year fixed rate ISA providers will require a minimum deposit. The size of the minimum deposit will be heavily dependent on the specific ISA provider. Typically, minimum deposits range between £100 and £2,000. It is important to check with the ISA provider before opening the 2 year fixed rate ISA.
It may be worth bearing in mind that you only have to commit your capital for 2 years to benefit from the interest of a 2 year fixed rate ISA; therefore, even if the minimum deposit is high, it may still be a good option to help your capital grow significantly.
Who can open an ISA
Not everyone is eligible to open a 2 year fixed rate ISA, as you must be over the age of 18 and living in the UK to do so.
If you are looking to open an ISA for someone under the age of 18, then you could open a 2 year fixed rate junior ISA; these are not as common as other types of ISAs.
Who can contribute to an ISA
Typically, there are no restrictions as to who can contribute to your 2 year fixed rate ISA. Although terms surrounding deposits will depend on the ISA provider, usually any contributions to your ISA will be seen as a gift. This means that parents, extended family members or even friends can add to your ISA to help your capital grow.
Financial Services Compensation Scheme protection
The Financial Services Compensation Scheme(FSCS) offers protection to a certain amount of capital in any account with an authorised UK bank or building society.
In the event that an authorised bank or building society collapses, the FSCS protection guarantees the return of up to £85,000 per person.
The extent of the FSCS's protection will depend heavily on how many ISAs you have and how much capital you have in them.
FSCS protection for 2 year fixed rate ISAs...
FSCS protection extends to 2 year fixed rate ISAs, providing the 2 year fixed rate ISA is with an authorised UK bank or building society.
Therefore, if you open a 2 year fixed rate ISA, your initial £85,000 will be protected and returned if your ISA provider collapses.
Due to the complex nature of the financial services market, some banking brands are under the umbrella of the same banking authorisation. Therefore, if you have opened multiple ISAs with different banking brands, you should double check that they do not share the same banking authorisation.
In the event that you have more than £85,000 in a 2 year fixed rate ISA in the same bank (or multiple banks under the same authorisation), you may want to transfer the excess to another bank with a separate authorisation to ensure your capital is fully protected by the FSCS.
The 2 year fixed rate ISA checklist
Our 2 year fixed rate ISA table above shows some of the most competitive ISA deals available. Although comparing the details of each ISA may be time consuming, it is worth doing your research to find the best 2 year fixed rate ISA for you.
You may find our ISA checklist useful when deciding which 2 year fixed rate ISA to open.
- Minimum ISA deposits: Typically, 2 year fixed rate ISAs will require a minimum deposit. Therefore, it is important to check the minimum deposit of each ISA deal and review how likely it is that you will need your capital in the near future, how much you can afford to lock up for the duration of the fixed term and if the minimum deposit level will take you over your tax-free ISA allowance.
- Additional bonus rewards: You may be drawn to a few 2 year fixed rate ISAs that offer additional bonuses or rewards; however, bear in mind that these rewards usually come at a price. The majority of banks that offer bonuses will decrease the rate of interest offered after the special reward is paid. If you choose an ISA with a special bonus, you may want to be prepared to switch to another ISA provider after the initial period ends.
- How the interest is calculated: Not every ISA provider will calculate and pay interest in the same way. For example some 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.
- Early closure/ withdrawal penalties: If there is a chance that you may require access to your capital within the next 2 years, it may be worth finding out whether the ISA provider you want to open an ISA with charges any early closure/withdrawal penalties. If the ISA provider does charge fees for early closure or withdrawal, you may want to find a different ISA provider.
