Fixed rate ISA vs Instant Access Savings

Starnip

If you want a high interest fixed account with the security of being able to access your money, isn't a fixed rate ISA the best option if it pays above 2.75% even if it is fixed you have the safety net of access albeit with a penalty? It's higher than 2.75% and unlike fixed savings ac which may pay higher you can access the money??

eskbanker

It depends on when you're likely to need the money - the penalty for accessing fixed term ISAs prematurely can lead to a negative return if taken too early, and even if the money is left for a significant portion of the term, the penalty will obviously reduce the return, potentially well below 2.75%.

Starnip

eskbanker said:

It depends on when you're likely to need the money - the penalty for accessing fixed term ISAs prematurely can lead to a negative return if taken too early, and even if the money is left for a significant portion of the term, the penalty will obviously reduce the return, potentially well below 2.75%.

Agree but if you simply want the option rather than having any intention surely it beats every other saving account no..?

eskbanker

Starnip said:

eskbanker said:

It depends on when you're likely to need the money - the penalty for accessing fixed term ISAs prematurely can lead to a negative return if taken too early, and even if the money is left for a significant portion of the term, the penalty will obviously reduce the return, potentially well below 2.75%.

Agree but if you simply want the option rather than having any intention surely it beats every other saving account no..?

I think that's too simplistic a view, in that if you ever needed to take up the option of accessing the funds then that would affect the comparison, possibly very significantly, so I don't think that aspect can be dismissed so readily.

It's not necessarily either/or though - splitting a pot to have some in a 2.75% easy access account and the rest in a fixed term ISA would be a valid approach.

Albermarle

Typically you can get 3.75% for a one year fixed ISA, which will have a 90 day interest penalty.
Rough calculation shows that withdrawing from it during most of the one year period would leave you worse off.

Of course if you did leave it for a year, you would be better off.

On balance if you just think you might need the money during the one year, but probably not, then sticking it in a one year ISA could be the best bet.
If you think you would probably need the money at some point during the year, then better/easier just to leave it in a good paying easy access account.

Starnip

Can the interest on a fixed rate (say 3 years) isa be paid out on a monthly basis to another account, or does it have to be added to the isa and is therefore be subject to any withdrawal penalty that a fixed rate isa may have?

eskbanker

Starnip said:

Can the interest on a fixed rate (say 3 years) isa be paid out on a monthly basis to another account, or does it have to be added to the isa and is therefore be subject to any withdrawal penalty that a fixed rate isa may have?

It depends on the terms of the account - some will allow monthly interest payments to an external account but others won't.

https://www.moneysavingexpert.com/savings/best-cash-isa/#fixed includes a column indicating accessibility of interest.

rumburake

Suppose you save £10000 but you need to withdraw your money maybe just before the year is done.

• With a 2.5% instant access ISA (Marcus) you would get about £10250
• With a 3.85% 1-year fixed ISA / 60 day penalty (Virgin), penalty is 3.85% / 6 = 0.64%; so you get £10385 - £64 = £10321
• With a 4.36% 2-year fixed ISA / 90 day penalty (Virgin), penalty is 4.36% / 4 = 1.09%; so you get £10436 - £109 = £10327

So does it look like the fixed term ISAs today are better than the instant access ISAs anyway? 

eskbanker

rumburake said:

Suppose you save £10000 but you need to withdraw your money maybe just before the year is done.

• With a 2.5% instant access ISA (Marcus) you would get about £10250
• With a 3.85% 1-year fixed ISA / 60 day penalty (Virgin), penalty is 3.85% / 6 = 0.64%; so you get £10385 - £64 = £10321
• With a 4.36% 2-year fixed ISA / 90 day penalty (Virgin), penalty is 4.36% / 4 = 1.09%; so you get £10436 - £109 = £10327

So does it look like the fixed term ISAs today are better than the instant access ISAs anyway? 

But if you needed to withdraw your money the day after depositing, or even a few weeks or months in, the evaluation would look rather different....

phillw

eskbanker said:
But if you needed to withdraw your money the day after depositing, or even a few weeks or months in, the evaluation would look rather different....

What you would need to do is work out how long it would need to stay invested to beat the 2.75% and then you could make a decision on whether you think it's likely you'll need it by then.

I think most people will have a better idea when they need access to their money & for can keep a small buffer to budget for likely emergencies.

Albermarle

rumburake said:

Suppose you save £10000 but you need to withdraw your money maybe just before the year is done.

• With a 2.5% instant access ISA (Marcus) you would get about £10250
• With a 3.85% 1-year fixed ISA / 60 day penalty (Virgin), penalty is 3.85% / 6 = 0.64%; so you get £10385 - £64 = £10321
• With a 4.36% 2-year fixed ISA / 90 day penalty (Virgin), penalty is 4.36% / 4 = 1.09%; so you get £10436 - £109 = £10327

So does it look like the fixed term ISAs today are better than the instant access ISAs anyway? 

I think those Virgin penalties are lower than most other providers. More typically it is 90 days on a one year fix and 180 days for breaking a two year fix.