What is an ISA
An ISA, also known as an individual savings account, enables you to access tax-free interest. Most of the banks in the UK provide ISA accounts; however, they do not set the tax-free limit. The tax-free interest ceiling is set by the government each year.
There are a number of different types of ISAS.
Cash ISAs or instant access ISAs
The majority of cash ISAs or instant access ISAs enable you to make a withdrawal at any point and earn tax-free interest on your capital.
The ability to make a withdrawal from a cash or instant access ISA comes at a price, which usually means lower interest rates than other ISAs.
Stocks and Shares ISAs
You can use an ISA as a vehicle for stocks and shares, which can enable you to make some serious growth on your initially invested capital.
The interest provided by stocks and shares ISAs depends on the performance of the investment.
Lifetime ISAs are useful for those looking for a long-term savings option. The majority of people who open a lifetime ISA will use them for saving for retirement or saving for a deposit for a house.
Although lifetime ISAs do not have the most competitive interest rates, the government will add a 25% bonus to your initially invested capital, up to a maximum of £1,000 per year.
Opening an ISA can be a great way to kick start your child’s savings. If you are looking to open an ISA for someone under the age of 18, then you should review your junior ISA options.
Fixed rate ISAs
To open a fixed rate ISA you need to be willing to lock up your capital for a prolonged period of time. Fixed rate ISAs give you the chance to earn tax-free interest for the duration of the fixed term.
Fixed rate ISAs often offer some of the more attractive rates of interest.
To explore your fixed rate ISA options review our table above and find the best available deals.
Common features found in fixed rate ISAs
Fixed rate ISAs will vary from provider to provider. There are some common features that can be found in the majority of the fixed rate ISAs available in the market.
To qualify for any 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 fixed rate ISA, providing you are a Crown servant (for example a part of the armed forces, a diplomat or overseas civil servant).
On the whole, fixed rate ISAs often provide some of the most competitive interest rates on the market. This means that not only can you enjoy tax-free interest up to a certain amount, but your capital has the chance to grow faster in a fixed rate ISA than any other ISA available.
The level of interest will change depending on the lender. See our table above to find the best fixed rate interest on the market. As a general rule, the longer the fixed rate ISA term, the higher the rates of interest.
The higher interest rates available through fixed rate ISAs come on the condition that you do not touch your capital for the duration of the fixed term.
If you prioritise access to your capital, then a fixed rate ISA may not be for you. This is because you will not be able make a withdrawal for the entirety of the fixed term.
It should be noted that some banks do not completely prohibit the access to your capital in a fixed rate ISA. However, the banks that do allow withdrawals often will levy an early withdrawal/closure charge.
It’s advisable only to open a fixed rate ISA if you are confident that you will not need your capital in the near future. This is because early withdrawal/closure charges are usually calculated on a number of days’ worth of interest and can be significant; depending on how long your capital has been in the ISA, you may receive a substantially reduced amount of capital than you invested.
Fixed rate ISA providers will typically require you to make a minimum deposit upon opening a fixed rate ISA. The minimum deposit size vary throughout the fixed rate ISAs available, but the majority of them range from £100 to £2,000. Before you open a fixed rate ISA, you should check the provider’s minimum deposit.
If the minimum deposit is too high, then you may want to explore shorter fixed rate ISAs. By opening a shorter fixed rate ISA, you only have to part with a large amount of your capital for a small period of time and still benefit from the tax-free interest.
Cooling off period...
There are ISA providers on the high street that are prepared to give you some leeway in relation to your deposit. Some ISA providers will allow a ‘cooling off period’ that gives you the freedom to change your mind and withdraw your capital from the ISA in the ‘cooling off period’.
Typically, ‘cooling off periods’ will only allow you to change your mind and pull your capital from the ISA within the first 14 days of opening the account. You may want to check with the ISA provider to see if they have a ‘cooling off period’ before you open a fixed rate ISA.
The ‘cooling off’ period may be an appealing feature if you are unsure about the amount you are willing to lock up in a fixed rate ISA. By opening an ISA with a ‘cooling off period’, you can stay flexible with your finance in the beginning of the fixed term.
All fixed rate ISAs will give you the opportunity to earn a certain amount of tax-free interest each year. The tax-free interest ceiling is set by the government each tax year. The tax-free interest ISA allowance for 2017/18 is £20,000.
The tax-free interest allowance cannot be saved up or carried over into the next year. Also, it is important to note that the tax-free allowance is split between your ISAs if you have multiple accounts.
Financial Services Compensation Scheme protection
The Financial Services Compensation Scheme (FSCS) offers a certain amount of protection to capital in an ISA.
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 fixed rate ISAs...
FSCS’s protection covers fixed rate ISAs, providing that the fixed rate ISA is with an authorised UK bank or building society.
The FSCS protection guarantees the safety and return of £85,000 per person. Therefore, if any authorised bank or building society collapses, the return of up to £85,000 is guaranteed.
Bear in mind that if you have opened multiple ISAs with different banking brands, your capital may not be fully protected. This is because some banking brands are under the umbrella of the same banking authorisation, and the FSCS protection is split between banking brands.
If you have more than £85,000 in a fixed rate ISA in the same bank (or multiple banks under the same authorisation) it's advisable to move the excess to benefit from another bank's FSCS protection.
Things to look out for when choosing a fixed rate ISA
How high the interest rates are will be one of the deciding factors when looking for an ISA account. Our table above allows you to compare and contrast some of the best fixed rate ISAs available.
However, the interest available in a fixed rate ISA is not the only factor you should consider when deciding which fixed rate ISA to open. The following is a checklist of what to keep an eye out for with a fixed rate ISA.
How the interest is calculated: Not only the size, but how the interest is calculated may determine which ISA is best for you. Some providers pay interest monthly, while others do so quarterly or annually. Before choosing your fixed rate ISA, you may want to check how the provider calculates the interest and how frequently payments are made.
Minimum ISA deposits: Although some fixed rate ISA providers do not have a minimum deposit, the majority of providers will require a certain size of deposit to open an ISA. Before opening an ISA you may want to see how likely it is that you will need your capital in the near future, how much you can afford to lock up for the fixed term and if the minimum deposit level will take you over this year's tax-free ISA allowance.
Additional bonus rewards: ISA providers will sometimes offer bonus rewards to attract new customers to open a fixed rate ISA with them. However, these bonuses usually come with terms and conditions, and it is not uncommon for ISA providers to drop their interest rates after the bonuses have been paid.
Early closure/ withdrawal penalties: You may want to choose an ISA provider that does not charge early closure/ withdrawal fees; these penalties can be significant and are usually calculated on a number of days' worth of interest. If you incur an early closure/ withdrawal penalty, then your capital may be reduced substantially.