Intro
If you are a UK resident, individual savings accounts (ISAs) are a great way to grow your savings tax-free. Before you start an ISA, you should decide what type of account you want to set up with a financial institution.
Cash ISAs are savings accounts that are available for UK residents above 16, and in a tax year (which runs from April 6 to April 5 each year), you can save up to £20,000 tax-free. A fixed rate cash ISA is a type of savings account that allows individuals to save money with a fixed interest rate for a certain period of time. The interest rate depends on the length of your term, but fixed-rate ISAs generally offer better rates than an easy-access ISA.
So is this ISA for you? Let’s find out!
THE ESSENCE
- You get a better interest rate which is guaranteed for a given period of time
- In a fixed rate cash ISA, your money is locked away for a set period of time
- You will have to pay a fee for any withdrawal before the end of the term
When should you choose a fixed rate ISA?
Interest rates on a fixed rate ISA are guaranteed to stay the same for a certain period of time, usually between 1 and 5 years. Keep in mind that a guaranteed rate might not keep up with the rate of inflation, which could reduce the purchasing power of the savings over time. Also, if interest rates rise, you won’t be able to benefit. In variable rate ISAs, the interest rate is not guaranteed and can change – also fall – depending on the market. Fixed-rate ISAs will serve you the best at times of protracted economic calm when interest rates are likely to stay unchanged in the long term.
There is usually a minimum amount you will need to put in to open a fixed rate ISA account, and you cannot add futher funds once you started the fixed term. You also can’t transfer the ISA into a new account until the end of the term.
If you want to be able to tap into your savings, you should go for an easy-access cash ISA as your money is locked away for a set period of time with a fixed rate cash ISA. The interest rates on the easy access accounts are lower, but you can take your money out without any extra charges.
How can you access your funds?
There could be unforeseen events which make you want to access your funds. With a fixed rate ISA that will cost you. Some fixed rate ISAs allow early access to funds only with a charge, such as a loss of interest or a reduction in the interest rate. With some providers, you must give a period of notice before you are able to withdraw your funds: typically between 30 and 180 days.
If you hold a ‘flexible’ cash ISA, you can take out cash and provided that you replace the amount during the same tax year, the withdrawal will not reduce your current year’s allowance. Bear in mind that even if your provider offers flexibility on fixed rate ISAs, you will still need to pay a fee for early withdrawal.
You have until midnight on 5 April each year to add money to you ISA, and the £20,000 allowance availabe does not roll over. During the current tax year, you can save up to £20,000 in one or several types of ISAs.
How safe are fixed rate cash ISAs?
Cash ISAs are covered by the Financial Services Compensation Scheme (FSCS) up to a maximum of £85,000. There is also no risk of capital loss with a cash ISA because the cash isn't invested.
In short, fixed rate ISAs are good for individuals who are looking for a guaranteed interest rate for a certain period of time, and who are willing to lock their money up for that period. It's important to compare the different fixed-rate ISAs available in the market, taking into consideration the terms, interest rates, and penalties.
What other ISAs are there?
Let’s recap what type of ISAs are available for UK residents:
| Type of ISA | What is it? | Age | Main features |
|---|---|---|---|
| Cash ISA | Savings account | 16+ | £20,000 annual allowance. Tax-free interest. |
| Lifetime ISA | House deposit and/or retirement savings account | 18-39 | £4,000 annual allowance with 25% top-up. Tax-free interest. |
| Junior ISA | Savings account | Under 18 | £9,000 annual allowance. Tax-free interest. |
| Stocks and Shares ISA | Investment account | 18+ | £20,000 annual allowance. Tax-free gains, dividends and interest. |
| Innovative Finance ISA | P2P lending investment | 18+ | £20,000 annual allowance. P2P lending and tax-free interest. |
For further details, check out our detailed guide on ISAs!
Being financially independent and conscious is very important, so well done on embarking on that journey! Our experienced team has developed a robust methodology that enables us to evaluate brokers and identify the best choices for opening an ISA account.
We, at BrokerChooser want to help you make sense of a complicated financial world. If you have any questions or suggestions, head over to the BrokerChooser Community page!
Further reading
- Everything you wanted to know about ISAs
- What is an ISA: an in-depth guide to tax-advantaged savings for UK residents
- How much can you put in an ISA?
- How many ISAs can I have?
- What is a Lifetime ISA and how best to use it?
- How to open a Lifetime ISA
- What is a cash ISA?
- What is a Junior ISA?
- What is a flexible ISA?
- What is an Innovative Finance ISA?
- How to transfer your ISA?
- How does an ISA work?
- Which is the better investment: pension or ISA?
- Is ISA only for UK citizens?
- What is the safest ISA?
- What happens to my ISA if I move abroad?
- Does an ISA beat inflation?
- Interest on cash ISA: much do they pay?
- IBKR offers global access with local benefits for ISA holders
Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology.
