Find out how to choose the fixed rate cash ISA that will help you maximise the return on your savings.
A fixed rate cash ISA savings account is an Individual Savings Account that guarantees a predetermined rate of return over a specific time frame. This is unlike an instant access cash ISA where the interest rate can vary at the ISA provider's discretion.
A fixed rate cash ISA can be a great option if the best cash ISA rates available in the market drop during the term of the fixed rate account as you’ll be earning more interest than would otherwise be possible.
On the other hand, you would lose out on better returns from the best cash ISA fixed rates if the overall market interest rates for ISAs do go up during the fixed term. This is something you need to take into account when you’re deciding how long to fix for.
The limits for investing in a fixed rate ISA are not any different from that of variable cash ISAs. Consequently for the 2012/2013 tax year you can save up to £5,640 in a fixed rate cash ISA, which is an increase from £5,340 in 2011/12.
Officially, there is no minimum ISA investment but many fixed rate ISA providers specify a minimum investment of £100 or £500 for you to open a fixed rate cash ISA. There are some thought that will require a minimum balance of thousands in return for their preferential fixed cash ISA rates.
When you compare the cash ISA accounts on offer from different ISA providers you need to check factors like minimum investment, total investment and whether transfers in from other ISA providers are accepted in order to find the best account.
Additionally, when choosing the fixed rate cash ISA investment that will work best for you, there are a couple of other things you need to take into consideration.
First, fixed rate cash ISAs differ in the length of their account term – this is the number of months or years you will need to commit your money to the account in return for a guaranteed rate of interest.
Generally, the longer the term of a fixed rate cash ISA, the higher the interest rate you are likely to get on your savings. Accounts with terms of between 1 and 5 years are available, but it’s the 5 year ISAs that offer the best fixed rate cash ISA rates.
Most fixed rate ISAs have penalties for early withdrawal so when choosing which fixed rate cash ISA will work best for you, start by evaluating how long you would be willing to wait before accessing your cash.
For instance, if you apply for a 3 year fixed rate cash ISA and, for some reason, find the need to take out the money after 1.5 years, the charges the ISA provider hits you with could negate any advantage of having opened the account as opposed to going for a 1 year fixed rate cash ISA or a variable rate cash ISA.
The penalty applied for early withdrawals is usually denoted as the equivalent of 90, 120 or 180 days interest. However, many providers will not allow you to access your money before the account term so this is something you need to check.
Some fixed rate cash ISA providers restrict transfers of ISAs from previous years. If you want to consolidate your previous years’ ISA balances into a new fixed rate ISA then whether transfers in are accepted is something that you will need to check before you apply for a new account.
