Switching 5 year fixed ISA one year in

singhini

A friend has asked me what my thought was in switching ISA providers. He put £70,000 into a 5 year cash ISA exactly one year ago at a rate of 1.51%
He has now seen rates advertised at 2.15% with other banks (for exactly the same thing i.e. 5 year fixed rate ISA).
He knows that if he transfers his existing money to another ISA he will have to pay roughly 6 months of interest as a penalty.
The question he asked me is if its worth switching.

I have approached the question in the following way
£70,000 + 1.51% = £71,057 (£1,057 interest over 12 months equivalent to £529 over 6 month)
£70,000 + 1.51% + 1.51% + 1.51% + 1.51% + 1.51% = £75,447 (£5,447 interest over the whole 5 years if he leaves it alone)
Versus:
£70,000 + £529 (6 moths of interest already earnt) = £70,529 + 2.15% + 2.15% + 2.15% + 2.15% (4 years) = £76,792

So if he leaves the money where it is he will end up with £75,447 at maturity which is in 4 years from now or if he switch now and gives up roughly half the interest he currently has earnt he will be able to transfer £70,529 which will be worth £76,792 in 4 years time from now (BUT that money will still be tied up for another year BUT will be earning 2.15%)

So in four years from now his current pot of money will be worth £75,447 versus switching now and in four years time it would be worth £76,792 (difference of £1,345)
Have I approached this correctly?

badger09

If he leaves it where it is, it will as you say, be worth £75447 in 4 years time.

If he asks for it to be transferred now, approx £70529 will be transferred but it will be locked in for 5 years, so it would be worth £78447 in 5 years time.

There isn't much point comparing the 4 year value, as you don't know the interest penalty for transferring at that point.

Personally, I wouldn't be happy locking such a sum up for so long at that sort of rate.

EachPenny

badger09 wrote: »

Personally, I wouldn't be happy locking such a sum up for so long at that sort of rate.

Same here. NS&I are offering a 3 year bond at 2.2% (non-ISA) but even that rate and length of fix isn't remotely attractive to me. A year ago I might have been tempted though.

singhini

Thanks guys, really appreciated for the responses.


I thought it was a lot to have in a cash ISA but hes 62 (I think) so nearing retirement and is risk cautious so not really into stocks and shares ISA this close to retirement.


I don't really want to suggest he does anything incase anything I say might bite me in the bum (but having looked into it, it would look like moving the money is the better option so I guess I should atleast tell him that).


A risk cautious Stocks & Shares ISA would be a better option as I'm guessing they are performing better than 1.51% even after any fund charges.


Any other thoughts out there from anybody else as to what to say or do?

badger09

singhini wrote: »

Thanks guys, really appreciated for the responses.


I thought it was a lot to have in a cash ISA but hes 62 (I think) so nearing retirement and is risk cautious so not really into stocks and shares ISA this close to retirement.


I don't really want to suggest he does anything incase anything I say might bite me in the bum (but having looked into it, it would look like moving the money is the better option so I guess I should atleast tell him that).


A risk cautious Stocks & Shares ISA would be a better option as I'm guessing they are performing better than 1.51% even after any fund charges.


Any other thoughts out there from anybody else as to what to say or do?

I'm 5 years older than your friend and retired several years ago:T but I have a substantial portion of my savings in a S&S ISA.

You might gently point out to your friend that there are different types of risk. Keeping all his savings in cash over the long term is guaranteed to lose him money because of inflation.

Is £70k his total savings? What is his pension provision like? Does he have a mortgage or other debts?

singhini

Hi Badger


I agree, cash gets eroded by inflation.
I'm not 100% sure about his personal finances but I know he has no mortgage and atleast £20,000 in high street bank earning 1.5%


Not sure about pension but probably £150,000 ?


He works (I think earning £30,000) and he wants to retire soon (hasn't said if he would retire now or next year or at 67, but wants to put his feet up soon as he keeps talking about retirement). I think whats stopping him retiring is the unknow i.e. unsure if he has enough to live off
So this all feeds back into why hes got £70,000 sat in a Cash-ISA and not invested in S&S-IS or other riskier investments.


He has no kids and wife sadly past away about 5-ish years ago

badger09

If your friend is at all interested, suggest he has a read around this site.

Its written in easy to understand language for a novice investor. Writer has a strong bias towards passive investing, buy IMHO, that's
not a bad thing when starting out.

http://monevator.com/investing-for-beginners-why-do-we-invest/