Fixed term cash ISA or easy access

kulath

It seems very likely that saving interest rates will rise (anyway let's assume that).

Would it be better to put this year's ISA allowance in an easy access account (at about 0.8%) and then transfer to a fixed term account when rates rise, or put it straight into a two or three year fix at 1.6% or 1.7%? In other words, would the loss of interest at the lower rate be made up by the higher interest later on?

(Yes, I am in the very fortunate position of paying tax on interest, so I do need the ISA).

Albermarle

In other words, would the loss of interest at the lower rate be made up by the higher interest later on?

 Without a crystal ball, nobody can answer this with any degree of certainty.

refluxer

I've recently had a Paragon 1 year fixed rate ISA mature and have transferred it into their Triple Access Cash ISA @ 0.8% for the time being for similar reasons but I'll be keeping an eye on rates and transferring to a fixed rate product in the not-too-distant future, I expect.

If it's that same account you're interest in, then just be aware that they do come and go so there's no guarantee it will be available for the whole of the duration between now and the 5th April. My ISA matured last weekend and it wasn't a maturity option, so the latest issue has only been around since then.

Another option is the 6 month Shawbrook Cash ISA @ 1.1%. Personally, I'm not fixing for any more than 1 year at the moment but I don't have a crystal ball !

dosh37

kulath said:

It seems very likely that saving interest rates will rise (anyway let's assume that).

Would it be better to put this year's ISA allowance in an easy access account (at about 0.8%) and then transfer to a fixed term account when rates rise, or put it straight into a two or three year fix at 1.6% or 1.7%? In other words, would the loss of interest at the lower rate be made up by the higher interest later on?

(Yes, I am in the very fortunate position of paying tax on interest, so I do need the ISA).

I am in a similar position and have been asking myself the same question.

In my case I have Shawbrook and Aldermore two year fixed ISAs (both around 1.45%) about to mature.

My maturity options:-

Aldermore

30day notice = 0.9%

1yr = 1.2%

2yr = 1.5%

Shawbrook

6mnth = 1.1%

1yr = 1.16%

1.5yr = 1.35%

2yr = 1.46%

(NB Shawbrook are now offering 1.25% for 1yr fixed on their website but that does not appear in the list of maturity options I was given.)

I found one website suggesting that the Bank of England rate could increase from 0.75% to around 1.25% by the end of the year if inflation continues to rise. Savings rates usually lag behind so, even if that were true, I would only expect an increase of around 0.25% in ISA rates. That would mean something like 1.5% for a 1yr fix.

I find working out some examples makes it easier to compare options:-

Suppose you have the maximum FSCS limit of £85K to invest over 2 years.

If you go with 0.8% easy access for year 1. That would give £680 interest.

Assuming interest rates increase as expected, if you then re-invest the total into a 1yr fixed @ 1.5% you would get £680 + £1285 = £1965

Alternatively you could go with Shawbrook 1.25% fixed for year 1.  That would give £1062.

Re-invest the total into a 1yr fixed @ 1.5% gives £1062 + £1291 = £2353.

If instead, you go with 2yr fixed @ 1.5%, then after 2 years you get £1275 + £1294 = £2569

You would be £604 better off compared to the easy access option or £216 better off compared to the 1 yr fix.

The downside is that you can't decide to take the money after 1 year without loss of interest.

Albermarle

NB Shawbrook are now offering 1.25% for 1yr fixed on their website but that does not appear in the list of maturity options I was given.)
I almost certain they would give you the higher rate anyway . For sure Aldermore would.
Shawbrook non ISA one year fix is 1.6%. So even if you did pay 20% tax on this you would be no worse off and the first £1000 of interest is tax free for a basic rate taxpayer ( less for a higher rate taxpayer and more for a non taxpayer) 

dosh37

Albermarle said:

NB Shawbrook are now offering 1.25% for 1yr fixed on their website but that does not appear in the list of maturity options I was given.)
I almost certain they would give you the higher rate anyway . For sure Aldermore would.
Shawbrook non ISA one year fix is 1.6%. So even if you did pay 20% tax on this you would be no worse off and the first £1000 of interest is tax free for a basic rate taxpayer ( less for a higher rate taxpayer and more for a non taxpayer) 

That's a good point. If you are a basic rate tax payer there seems little advantage in having an ISA - even without taking into account the £1000 savings tax allowance.

Sticking with the previous example using Shawbrook non ISA rates (and assuming all the savings tax allowance has been used up elsewhere)...

Year 1 fixed @ 1.6% we get £1360 gross interest or £1088 after 20% tax.

Year 2 fixed @ 1.85% (assumed 0.25% increase) we get £1592 gross or £1274 after tax.

Total = £2362 Net.

£9 better than the ISA option.

If we go with a Shawbrook 2 yr fixed rate bond @ 1.83% (assuming interest is added back into the account at the end of the year) we get...

£1555 gross after year 1

£1584 gross after year 2

Total = £3139 Gross or £2512 after 20% tax (the tax is payable at the end of the two years).

£57 worse than the equivalent ISA option.

dosh37

The difference in interest is almost insignificant when compared to the effect of inflation over the two years.

If we ignore interest and assume an average 7% inflation rate for both years...

After 1 year, the initial £85000 is only worth £79050 compared to today.

After 2 years it's only worth £73516.

So you end up effectively £11,484 worse off.

Taking into account the best interest option, you have still lost £8915.

Apart from keeping some cash for emergencies or saving for a big ticket item, there doesn't seem much point in saving.