Many or all of the products and brands we promote and feature including our ‘Partner Spotlights’ are from our partners who compensate us. However, this does not influence our editorial opinion found in articles, reviews and our ‘Best’ tables. Our opinion is our own. Read more on our methodology here.
Table of Contents
UK interest rates have climbed significantly over recent years, giving cash ISAs the potential to provide savers with some real bang for their buck. It’s always better to earn some interest on your money rather than none whatsoever, and now savers can enjoy significant returns.
By choosing a fixed-rate ISA, you are likely to get a higher rate of interest than you would with an easy access ISA. This is because you’re required to lock your money away for a fixed period, typically between one and five years, whereas with an easy access account you can access your money whenever you need to.
Here, we explain what you need to know about fixed-rate ISAs.
What is a fixed-rate ISA?
A fixed-rate cash ISA is an ISA where you are given a set rate of interest that is guaranteed for a certain period of time.
You deposit your savings when you open the account and then at the end of the term you can withdraw the money or switch it into a new fixed-rate ISA. If you take the money out before this point, you will usually face a penalty of loss of interest.
As with all ISAs, you won’t pay any tax on the interest you earn and you can put away up to £20,000 in the current tax year, which will end on 5 April. At this point, everyone (aged 16 and over) is given a brand new ISA allowance.
How a fixed-rate cash ISA works
When you open a fixed-rate cash ISA account, you can deposit your savings (up to a maximum limit) and you’ll then earn interest, either monthly or annually, on your money until the end of the term.
You can choose the length of the fixed-rate ISA from one to five years. Depending on how long you choose to put your money away for, the interest rate you are offered will change. Sometimes, a longer term can mean higher interest rates, but this is not always the case.
» MORE: A Guide to ISAs
How to open a fixed-rate ISA
You can open a fixed-rate ISA at a branch, online, by post, or sometimes over the phone. Each provider will have its own rules about how to open an account. Some will only be available online while others may only be available on a postal basis.
How to choose a fixed-rate ISA
There are quite a few ISAs to choose from, so before you sign on the dotted line it’s important to make sure the account you’ve picked is right for you. To help you decide, here are some of the main pros and cons of a fixed-rate ISA.
Pros of a fixed-rate ISA
- You’ll know exactly how much interest you’ll earn on your savings.
- By locking your money away you may be able to earn a higher rate of interest.
Cons of a fixed rate ISA
- If you do need to access your money early, you may face a penalty.
- If interest rates rise, and you’re locked into a fixed-rate ISA, you won’t be able to benefit.
» MORE: Choosing an ISA
What’s the difference between a fixed-rate ISA and a fixed-rate savings bond?
The main difference is that ISAs are tax-free, so you won’t be charged any tax on your savings held within an ISA. Although savings bonds are taxed, everyone has a personal savings allowance (PSA). This means basic-rate taxpayers can earn up to £1,000 a year and higher-rate taxpayers can earn up to £500 in interest a year before they start paying tax. Additional-rate taxpayers (those earning more than £125,140 per year) are not eligible for a personal savings allowance.
Can I add money to a fixed-rate ISA?
There is often a minimum amount you will need to open an account, which is typically between £500 and £1,000. However, some accounts can be opened with as little as £1. Some fixed-rate ISAs allow you to add extra money to an account when you open it for a limited period, for example, up to 30 days.
This money is then locked away until the end of the term of the account and you can’t usually add any extra money into it. You also can’t transfer the ISA into a new account until the end of the term. If you close the account early, or transfer the money within it to a new account, you’ll face a penalty. This is usually a loss of interest that can wipe out any gains you’ve built up so far.
How is my money protected?
All UK cash ISAs provided by banks, building societies, and credit unions are protected by the Financial Services Compensation Scheme (FSCS). This protects up to £85,000 per person, per banking group, if an institution goes bust.
Duncan Ferris, Lead Writer and Business Expert at NerdWallet
What our Nerds say…
“FSCS protection only applies once per person, per institution, which could impact the ISA you choose. If you already have a large amount of money saved with one provider, even if it is spread across current accounts, savings accounts and ISAs, you will only be covered for eligible deposits up to £85,000. That’s why some savers diversify across different providers.”
It’s also worth noting that different banking brands can be registered under the same umbrella, so the FSCS protection will only apply up to the £85,000 limit across each brand. For example, First Direct and HSBC share FSCS coverage.
» MORE: ISA or Savings Account: Which is Best for Me?
Image source: Getty Images
Dive even deeper
What is an ISA? How Individual Savings Accounts Work
by Holly Bennett
How Much Can You Put in an ISA Using Your Annual Allowance?
by Sam Bromley
by Felicity Hannah