Savers were dealt yet another body blow in March as the Bank of England slashed the base rate of interest from 0.75% to 0.25% to support the economy through the coronavirus pandemic. Cash savers have struggled with below-inflation interest rates on their money for more than a decade, which means many will be losing money in real terms. For a slightly better rate and a little more certainty, consider a fixed rate Cash ISA.
What's in this guide to Fixed Rate Cash ISAs?
- How do Fixed Rate Cash ISAs work?
- Pros and cons of fixed-rate Cash ISAs
- Where are the best Fixed Rate Cash ISAs deals?
- Here are a few of the best Fixed Rate Cash ISAs deals available at the moment:
How do Fixed Rate Cash ISAs work?
ISA stands for Individual Savings Account, it is known as a ‘tax wrapper’ which means it lets you save without having to pay any tax on the interest you earn. You can put in up to £20,000 a year into an ISA, this is your ISA allowance. Cash ISAs can be either variable rate or fixed rate accounts. Variable means the rate can change depending on what the Bank of England base rate is, while a fixed rate accounts offers you an unchanged rate for a certain time period, but you will usually have to lock your money away for between one and five years.
Pros and cons of fixed-rate Cash ISAs
The pros are mainly peace of mind: you know what interest rate you will get and that it won’t change during the term of your account. Usually, the trade-off is that you won’t be able to access your cash for that fixed term, and this can work against you if rates go up and you’re locked in to a lower-paying deal. Depending on whether you think interest rates will go up or down from here, you could choose a longer or shorter fixed term for your ISA.
The personal savings allowance lets savers earn up to £1,000 a year in interest tax-free, which means most people currently don’t pay tax on their savings. However, ISAs are still useful, especially for high earners who pay higher-rate tax, and will be for other savers in future if interest rates rise and they finally begin earning more on their money.
Generally speaking, the longer the term of the ISA, the better rate you could get. If you do need to withdraw your money early you may have to pay a penalty or the account may be closed. Different accounts will have different restrictions, some will not allow you to put in additional money once the account is opened, so check the small print.
Where are the best Fixed Rate Cash ISAs deals?
Good deals will be fewer and farther between as banks pass on the Bank of England rate cut to savers, and already they are looking scarce: the average rate on a longer-term Cash ISA is just 1.29%, according to Moneyfacts. Anna Bowes, co-founder of Savings Champion, said while the BoE action could be vital in supporting small businesses during the coronavirus crisis, it is “devastating” for savers. “Some providers, including most of the big high street banks, are already paying such low interest rates to their savers, that there is very little wiggle room to make things much worse,” she said. “While we are certain that providers will pass on at least some of the dramatic rate cut to savers, we hope that those that do, will match this action to support borrowers, not simply take advantage of this situation to improve their margins.”
Here are a few of the best Fixed Rate Cash ISAs deals available at the moment:
- United Trust Bank offers a 7 Year Bond paying 1.85% AER but you have to pay in at least £15,000 and no further additions are allowed. Early withdrawals are subject to a penalty but you can withdraw the interest annually.
- Hodge Bank pays 1.65% AER on its 5 Year Fixed Rate Cash ISA on balances of £1,000 or more. You lose a year’s worth of interest if you close the account early and you can’t make extra deposits.
- Aldermore pays 1.55% AER on its 3 Year Fixed Rate Cash ISA on balances of £1,000 or more. Early access will cost you 180 days’ worth of interest. This is a flexible Cash ISA, so you can replace money you’ve withdrawn in the same tax year without it counting towards your ISA allowance.
- Al Rayan Bank pays 1.5% on its 24 Month Fixed Term Deposit Cash ISA. The minimum subscription is £1,000 and you can make further additions during the term. The account is Shariah-compliant.