Possible problem with fixed rate ISA

Baalmaiden

I have been considering moving my previous years ISA to Halifax's 4 year fixed rate ISA (at 4%). However on reading the terms and conditions I understand that the interest is paid on maturity. Does this mean that on say, £10,000 you just get £400 after 4 years, i.e. not compounded? also what happens to the ISA, can you reinvest the lot in another ISA? I think I shall have to ring Halifax up to find out.

atypical

The interest rate is 4% AER i.e. annual equivalent rate. You'll get the equivalent of 4% every year at the end of the term. It will take into consideration compounding effects.

At the end of the term you are free to do whatever you so wish the money.

rb10

Baalmaiden wrote: »

I have been considering moving my previous years ISA to Halifax's 4 year fixed rate ISA (at 4%). However on reading the terms and conditions I understand that the interest is paid on maturity. Does this mean that on say, £10,000 you just get £400 after 4 years, i.e. not compounded? also what happens to the ISA, can you reinvest the lot in another ISA? I think I shall have to ring Halifax up to find out.

The 4% is the AER, so is the amount you get per year. The interest is compounded each year on the anniversary of opening the account, but not actually paid into the account until maturity.

So on £10,000, you can expect to get £10,000 * 1.04 ^ 4 = £11698.59 back at the end of the four years (i.e. just short of £1700 in interest).

Once it has matured, you can withdraw the money, transfer it to another ISA ... basically it's up to you to do what you like with it then.

natman

I suppose the main issue I have with this, is the flexibility and what will happen to interest rates -
Is it worth tieing it all up for 4 years where I am presuming you cant touch it for all this time, where other accounts do offer less rates for bigger flexibiltity.
4 years is a long time.

I fixed my Mortgage only 4 months ago and theres better deals, so swings and roundabouts. personally for me 4 years is too long in relation to saving accounts -

Barclays have 3.61% at present instant access
Marks and spencer 3% instant access
Halifax 3%

I would personally sacrifice some intrest rate for flexibility, and plan for 12 months with an ISA.
It you had your ISA IN AN ACCOUNT just paying 3% at the end of 4 years you will have earnerd £11,364 or there abouts a difference of £334, which is some difference, but broken down you will make around £83 a year more in your fix.
You could also do it this way - I am trying to guess your money here so bear with me

Year 1 - 3600 in Barclays at 3.61% and £6400 in Marks and spencer at 3.1% (£10,000 in total) - Interest = £3730 +6598 Total at the end of 12 months = 10,328 Compared to the 4% at 10,000 youi would get in year 1 in the halifax = £10400, that is £72 difference, I suppose only you can decide if this is worth it, by sticking to an account which may become inflexible, poor paying in two years time, and you are penalised for then moving your money.

Good luck

Robtyketto

Can I assume that if you invest in a fixed rate ISA Saver for 4 years you CANNOT invest the £3,600 for the last 3 years (Only adding the initial £3600 on inital opening of the account)?

You are free of course to invest the £3600 in another kind of ISA account.

Thanks.

BruceyBonus

Robtyketto wrote: »

Can I assume that if you invest in a fixed rate ISA Saver for 4 years you CANNOT invest the £3,600 for the last 3 years (Only adding the initial £3600 on inital opening of the account)?

You are free of course to invest the £3600 in another kind of ISA account.

Thanks.

Correct, you cannot add to the ISA but you can open another one for each subsequent financial year.

Robtyketto

Maybe this deserves a thread of its own but I don't understand what variable rate ISA Savers involve.

Halifax variable rate ISA saver quotes the AER for 27K+ as 0.25%

If I invested 27K (I wish!) for 1 year what actual interest would I get at the end, could this please be explained to me in layman terms?

Thanks.

BruceyBonus

Robtyketto wrote: »

Maybe this deserves a thread of its own but I don't understand what variable rate ISA Savers involve.

Halifax variable rate ISA saver quotes the AER for 27K+ as 0.25%

If I invested 27K (I wish!) for 1 year what actual interest would I get at the end, could this please be explained to me in layman terms?

Thanks.

27000 * 0.0025 = £67.50
There are a lot better rates available - you could get >£750 interest on that sum.

Edit: Also, unless it is already in an ISA, you can only subscribe £3600 per year.

Robtyketto

Thanks for both replies, I thought it was as you described but as it was so low I thought maybe I missed a trick.

Reaper

Robtyketto wrote: »

I don't understand what variable rate ISA Savers involve...what actual interest would I get at the end

Being a varible rate you don't know what you will get at the end. The "AER" rate they quote allows you to work out how much interest you would earn if interest rates remain unchanged. However if they change you will earn more or less.

The calculation is done daily using the current rate. So for example if interest rates doubled the day before the interest was due to be added to your account it would barely make any difference. If they doubled a week after you started saving it would make a big difference.

tramoia

There is actually no compounding effect with this account. When I signed up for it I asked the branch assistant if she could check that the 4% was added to the capital sum each year. The answer is that it is not. So on 10,000 pounds initial investment you will get 1600 pound final interest added, which is a small amount less than if it was compounded each year.
Even so I think its a good deal and signed up for this four year option. My logic is that if interest rates do shoot up later I am happy to transfer to a better account and pay the interest penalty for early withdrawal. If it remains competitive becasue interest rates stay low I am still happy.