Find out how to secure the 3 year fixed rate cash ISA that will help to maximise your tax free return.
A 3 year fixed rate cash ISA locks in your money for 36 months in return for a higher interest rate than would be available from most instant access, 1 year fixed rate and 2 year fixed rate ISAs.
They pay you a guaranteed rate of interest for the duration of the 3 year term and, because you’re saving in an ISA bond, the interest you earn will be paid tax-free enhancing your return.
However, 3 years represents a comparatively long term and this can sometimes be a disadvantage. If the interest rates available on ISAs increase significantly during the fixed rate period, then you could miss out on the potential additional interest income as you would not be able to move your money to a more profitable home.
The flipside is you will be earning more interest than would otherwise be possible if interest rates head south.
The majority of 3 year fixed rate ISAs will not allow access to your money during the account term, although a few will allow early withdrawals subject to either account closure or an interest penalty – usually in the region of 120 or 180 days worth of interest.
So how do you compare 3 year fixed rate ISAs? It starts with the interest rate.
Higher 3 year ISA fixed rates mean your savings’ earning power goes further. However, make sure that you are comparing like with like. Your focus should be on the Annual Equivalent Rate (AER) offered by different institutions on the amount you have to invest.
Some ISA providers will reserve the best 3 year ISA rates for those with high balances so you need to make sure you understand exactly what you’ll earn before you apply.
Does the ISA provider require a minimum deposit and if so how much?
The minimum deposit with which you can open a 3 year fixed rate cash ISA varies from £1 to £5,760 depending on the account.
When you’re looking for the best 3 year ISA bond you’ll need to check that you can fulfil the minimum deposit requirements specified by an account provider.
The amount you can invest in the best 3 year fixed rate ISA each tax year is capped at £5,760. However, if the ISA provider accepts transfers in from previous years’ ISA allowances then you should be able to invest more than this in your 3 year ISA – providing you arrange the transfer through your cash ISA provider.
Remember that the fixed rate is for a fixed term – in this case, 3 years. Once the 3 years lapse, ISA providers automatically transfer your account to a significantly lower interest rate. For this reason you’ll need to make a note to transfer your funds to a new ISA if you want to continue enjoying a competitive interest rate.