Ditch and switch 5 year fixed rate ISA?

Slinky

Family member is a higher rate tax payer. Has a fixed rate ISA paying 1.1% opened April 2021 due to mature in April 2026. Need to investigate the cancellation terms, with Shawbrook, am thinking 6 months interest penalty, but given that the rates for fixed rate are as high as 2.65% for 2 years elsewhere, would it be worthwhile to ditch and switch? Can't get my head around the exact maths at the moment, but it would seem a sensible move.

refluxer

What's the value of the ISA ?

refluxer

Using this simple interest calculator, here's the way I would work it out if it was (for example) for £20k...(all numbers rounded off for simplicity)

£20k @ 1.1% from 01/04/21 to 01/04/26 would ultimately be worth £21,101 and therefore have earned £1,101 in interest if the ISA was left to run it's course.

For an early transfer within that time period, the 180 day penalty would be £109

If they transferred today, the value of the ISA would be £20,278 minus the £109 penalty = £20,169

If they then took that £20,169 and put it in a 5 year fixed ISA today @ 2.6%, it would be worth £22,132 on 01/04/26 and therefore have earnt £2,132 in interest (in total) up to that point, making them £1,031 better off on that particular date compared with having stuck with the original ISA @ 1.1%.

So switching is pretty-much a no-brainer according to my calculations, but do bear in mind that they are only rough so please do your own to confirm. They are also based on the presumption that no interest is lost during the transfer process (interest is normally back-dated I think) but even if that wasn't the case, it shouldn't make a significant difference to the outcome. Hopefully someone will step in if I've missed anything obvious while trying to work this out.

It's worth noting that you can currently beat the best 5 year fixed rate deal by going for a 30 month Fixed Rate ISA @ 2.75% with the Leeds BS at the moment but even that rate could look low by the end of the year, based on how rates have been rising for the first half of this year.

Albermarle

Family member is a higher rate tax payer

This is not relevant to your question about switching ISA's

It would only be relevant if they were saving in non ISA accounts.

intalex

I've done the exact same thing switching from a 5-year 1% fixed (paying a 1-year interest as penalty) to move to a 2.5-year 1.7% fixed, having done the sums and found significant gains overall. If rates keep rising, I could even repeat this. The emotion of immediate loss often deters us, but over the entire term if the maths show more favourable returns, then it's worth it.

Slinky

Albermarle said:

Family member is a higher rate tax payer

This is not relevant to your question about switching ISA's

It would only be relevant if they were saving in non ISA accounts.

I only mentioned it to head off potential suggestions for holding the cash outside of an ISA as obviously the tax free amount to be earned is only £500 instead of the more usual £1000 a year.