Are Fixed Rate ISAs a good idea?
If you’ve been comparing savings accounts, you’ve probably come across Fixed Rate ISAs. Fixed Rate ISAs are a great way to get a guaranteed interest rate, but are they right for you or are there better ways to grow your savings?
In this guide
- What is a Fixed Rate ISA?
- Are Fixed Rate ISAs a good idea?
- When is a Fixed Rate ISA a good idea?
- Saving for a house? You might be better suited to a Lifetime ISA
- Are Fixed Rate ISAs better than regular savings accounts?
- What happens when the fixed term ends?
- What if interest rates go up after I open a Fixed Rate ISA?
Withdrawing funds before maturity will incur a charge. Partial withdrawals from a Fixed Rate ISA are restricted. Tax treatment depends on individual circumstances and may be subject to change in the future
What is a Fixed Rate ISA?
A Fixed Rate ISA is a type of Cash ISA that pays a guaranteed rate of interest for a set period, usually between 1 and 5 years. While your money is in the account, the rate won’t change, and your interest is completely tax-free (thanks to the ISA wrapper). However, in return for the guaranteed interest rate, you’ll agree not to make any withdrawals until the end of the term. Many providers will restrict deposits too, letting you deposit a lump sum when you first open the ISA before locking your account until the term is complete.
Learn more: Do you pay tax on savings interest?
Are Fixed Rate ISAs a good idea?
Fixed Rate ISAs can be a good idea if you want a guaranteed interest rate and are comfortable locking away your money for a number of years. The main advantage is the higher interest rates they often offer compared to easy-access ISAs, making them ideal for long-term saving. However, they come with the drawback of limited flexibility, as early withdrawals usually incur penalties. Plus, if interest rates rise, your rate will stay the same, so you might find yourself missing out on a better interest rate. But the reverse could happen, where interest rates drop while you’re benefitting from a higher locked-in rate.
Pros and cons of Fixed Rate ISAs
Pros
Tax-free interest. You won’t pay tax on any interest earned within your ISA, even if you go over your Personal Savings Allowance.
Protection from falling rates. If interest rates drop, your savings will keep earning the same rate until the end of your fixed term.
Encourages saving discipline. Locking your money away can remove the temptation to dip into your savings for purchases that don’t match up to your goals.
Cons
Limited access to your money. You won’t be able to make withdrawals during the fixed term without paying a penalty or closing the account.
Penalty for early closure. If you need to access your money early, you’ll usually lose some or all of the interest earned.
Rates are fixed. If interest rates rise, your ISA rate won’t increase with them, so you could end up earning less than if you’d waited to open a Fixed Rate ISA at a later date.
When is a Fixed Rate ISA a good idea?
Whether a Fixed Rate ISA is right for you depends on whether you’re happy to lock away your money for at least a year, if not longer, and if you think interest rates may drop and you want to lock in a rate. Unlike variable-rate accounts, your interest rate is fixed, so you know exactly how much you’ll earn, no matter what happens with inflation or the Bank of England’s base rate. If you’re saving for something specific (like a house deposit or wedding in a few years), a Fixed Rate ISA can help you set that money aside and avoid the temptation to dip in.
As an ISA, any interest you earn from a Fixed Rate ISA will also be tax-free, which can be particularly useful if you’ve used up your Personal Savings Allowance, you’re a higher or additional rate taxpayer, or you want to protect your savings from future tax changes.
Learn more: How many Fixed Rate ISAs can I have?
Saving for a house? You might be better suited to a Lifetime ISA
If you’re saving for your first home and put all your savings in a Fixed Rate ISA, you could miss out on up to £1,000 a year from the government! That’s because first-time buyers can save up to £4,000 a year in a Lifetime ISA and get a 25% bonus towards an eligible property worth up to £450,000.
So, max out your Lifetime ISA three years in a row and you’ll get a £3,000 bonus from the government, bringing your total deposit to £15,000! And that’s without even taking interest into account. With a Tembo Cash Lifetime ISA, you’ll also earn our market-leading rate of 4.6% AER (variable), boosting your deposit even further.
Learn more: Should I get an ISA?
Ineligible Lifetime ISA withdrawals may return less than paid in.
Are Fixed Rate ISAs better than regular savings accounts?
They can be better than a regular savings account, especially if you’ve used your Personal Savings Allowance or want a tax-free way to lock in a strong rate. Which account is best for you will depend on your personal circumstances, such as whether you can lock away savings for a number of years without needing access to them.
What happens when the fixed term ends?
When your Fixed Rate ISA reaches the end of its term it reaches “maturity”, which means the fixed period has ended and your ISA is no longer subject to its original terms. You’ll normally be contacted by your provider a few weeks before the maturity date with details of your options. Usually, you can choose to withdraw your money, transfer to another ISA, re-fix for a new term, or do nothing and allow your provider to move your funds into a holding account, usually an easy access Cash ISA.
Find out more here: What happens at the end of a Fixed Rate ISA?
What if interest rates go up after I open a Fixed Rate ISA?
If interest rates go up and your savings are in a Fixed Rate ISA your rate won’t change. That’s both the benefit and the drawback of fixing. If rates rise, you might earn less than you could have elsewhere. But if they fall, you’ll be glad you're locked in!
