Isas: is a fixed rate or easy access better when interest rates rise? | Money
IInterest rates have risen again this week, leaving those considering putting money in a cash box with a choice. If they want a (slightly) better interest rate – up to 1.9% at the time of writing – a fixed rate Isa may be the way to go.
However, it does involve locking up your money at a fixed rate, often for several years, which may seem like a strange thing to do in today’s uncertain climate and when interest rates are rising.
Easy-to-access Isas give you more flexibility and, in theory at least, could benefit from any savings rate hikes that banks deign to pass on, but rates are currently lower: the highs this week were around 0.8%.
Still, one of the most popular offerings is probably Isa Easy Money from Marcus, Goldman Sachs’ online banking brand, which this week was paying a floating rate of 0.7% (this includes a interest bonus of 0.1% fixed for the first 12 months).
You don’t have long to use your Isa 2021-22 allowance. These accounts allow you protect the return on your savings from tax.
There are several types, although the two main ones are Isa cash and Isa stocks and shares. During the current tax year you can save up to £20,000 in one type, or in two or more.
You have until April 5 at midnight each year to add money, and the annual allowance does not carry over.
Some experts claim that the introduction in 2016 of the personal savings allowance means that there is no great interest in having Isa cash. This allowance means that base rate taxpayers can receive £1,000 in interest each year tax free, while higher rate taxpayers can receive up to £500.
But Isas still has his supporters, who say people should use the existing rules while they can. Some savers like the discipline of choosing an Isa every year. Also, you can transfer money from a cash Isa to a stock and share without using a new allocation. This gives you the opportunity in the future to channel your nest egg into the stock market.
As for the choice between a fixed rate or a variable rate (easy-to-access Isas generally offer a variable rate), Rachel Springall of the financial data provider Money facts admits: “It’s tricky.”
Remember that you can often get a higher interest rate if you opt for an account that is not an Isa. In effect, you pay a small premium for the long-term tax benefits.
For example, at the time of writing, the highest paying non-Isa easy-to-access savings account, Virgin Money, was offering 1%. Meanwhile, the highest paying cash equivalent Isas included the Yorkshire Building Society’s Internet Saver Isa Plus Issue 10, paying between 0.6% and 0.82% depending on account balance, and the Melton Building’s Easy Access Isa Society paying 0.8% (this account is currently restricted to customers residing in Leicestershire, Nottinghamshire, Lincolnshire or Rutland or people who have been a Society member for five years or more).
It’s a similar story with Fixed Rate Bonds versus Fixed Rate Isas: Earlier this week, you could get a one-year fixed rate bond from Al Rayan Bank by paying 1.61 %, but the best you could get from a one year Isa fixed rate bond was 1.21% from Castle Trust Bank. Meanwhile, Shawbrook Bank was offering an 18 month fixed rate Isa paying 1.35%. However, with everything going on right now, a lot of people won’t want to tie up their money even for a year.
“The way the market has evolved over the years is that there are a lot more challenger banks outside of the Isa market,” Springall says.
Halfway between an easy-to-access Isa and a package, it’s an Isa opinion. With these, you need to give notice – usually between 30 and 180 days – before you can withdraw your funds. That means you’re not locked in for a year or more. But the current rates on offer may not be tempting enough for some.
A possible argument for a fixed rate is that if the Bank of England base rate has risen three times in the past 12 months, climbing from 0.1% to 0.75%most variable-rate savings accounts passed on only part of it, or none at all.
If you have accumulated a number of cash Isa accounts over the years with various banks and building societies, now is the time to check the rates you are getting. If they’re particularly bad, consider switching to another provider.
Some people also argue that it’s easier to keep an eye on your money if you consolidate multiple Isas into one account.
You can transfer your Isa(s) from one financial company to another at any time and, if you wish, move your savings from an Isa in cash to an Isa in shares and vice versa.
With regard to sums invested in previous years, you can choose to transfer all or part of your savings. But if you transfer an Isa to which you have contributed during the current tax year to a new provider, you must transfer the entire balance. To switch, contact the Isa provider you wish to switch to and complete a transfer form. (If you withdraw the money without doing so, your savings could lose their tax-exempt status.)
However, you need to make sure that the account you want to switch to accepts “inbound transfers” of existing Isa Money. Not all do: some are only open to new funds. For example, Marcus cash Isa does not allow transfers.
“Most good rates accept transfers,” says Springall.