Fixed rate ISA

Lauxy1979

I have this years full ISA allowance to invest. This is the first time I have had a sum of money to save due to an unexpected inheritance. I want to get the best interest rate for my money and was looking at the Coventry's fixed 5% rate for 5 years ISA. As far as I can tell the penalty for closing the ISA is 120 days interest. I worked out this is about £85. So surely it is better for me to invest my money in an ISA like this one and then pay the penalty if interest rates do rise significantly pay the penalty and move the money to another ISA. It is unlikely that I am ever going to have the money to invest in an ISA to the full allowance every year so I can't see it clashing with my ISA allowance if I did close it and open a new ISA if interest rates do change.

Does this make sense? I am fairly new to this so don't want to have overlooked something that makes this a bad plan. Any advice would be much appreciated.

SnowMan

No you don't seem to have overlooked anything. It is a very good ISA account because of the withdrawal option.

If interest rates stay low then you hold for the full 5 years and get 5% per annum.

If rates increase above 5% over the 5 years then you can transfer out and will have roughly received after allowing for the penalty 3.27% pa (if closing after 1 year), 4.13% pa (2 years), 4.42% pa (3 years), 4.57% pa (4 years). These are reasonable rates compared with investing fixed for 1,2,3 or 4 years or at a variable rate at outset.

I am assuming (and this is different to what you are assuming) when it says you can close with 120 days interest penalty that includes being able to transfer out to another ISA elsewhere with 120 days interest penalty (after all you will want to retain the tax free status if you get out early by transferring elsewhere). Might be worth clarifying that with the Coventry.

kidmugsy

Seconded: it's an attractive deal. The other thing to consider is Index-Linked Savings Certificates from ns&i. Their maximum term is 5 years but there's very little cost to pulling out after one year.