Transferring Fixed Cash ISA and Paying Penalty

drlabman

I'm 70 days into a 1 yr fixed cash ISA earning 2.56%.  The same bank are currently offering a 1yr fixed earning 3.59%.  I'm considering transferring to the new ISA and paying the penalty of 90 days (tax-free) interest.  However, I'm really struggling to do the maths to work out if it's a wise thing to do.

One of the things I'm not sure of is whether I've earned 70 days interest so far, so I'd effectively be losing 20 days interest.

My maths is normally pretty good but this is twisting my melon.

refluxer

drlabman said:

One of the things I'm not sure of is whether I've earned 70 days interest so far, so I'd effectively be losing 20 days interest.

If you're only 70 days into a 1 year fix and the penalty to transfer away is 90 days, then you'll lose the interest you're earned so far plus they'll deduct an amount equivalent to a further 20 days which means you'll get back less than you put in.

However - as the rate on the ISA you want to transfer to is a fair amount higher, it's possible you might still be better off in the long run.

refluxer

How much do you have in the ISA ?

drlabman

refluxer said:

How much do you have in the ISA ?

The amount is irrelevant, isn't it?  But for the sake of argument, let's play round numbers - £100K.

rallycurve

Yes, the amount is irrelevant...

For every £1000 you have in it, you'd have to pay £6.31 penalty: 1000*(2.56/100)*90/365
However, those £1000 will earn you ~£0.86 more every month in the new ISA: 1000*((3.59-2.56)/100)/12
That is 2.82p a day: 1000*((3.59-2.56)/100)/365

If you are 70 days in, by the time your current ISA matures (in 295 days), you'd earn £8.32 more than with the old ISA: 295*1000*((3.59-2.56)/100)/365

So £8.32 - £6.31 = £2.01... it looks like you might be better off by transferring

Albermarle

There are better one year fix rates available.
Best 1 Year Fixed Rate Bonds Up To 4.37% Fixed | moneyfacts.co.uk

rallycurve

Albermarle said:

There are better one year fix rates available.
Best 1 Year Fixed Rate Bonds Up To 4.37% Fixed | moneyfacts.co.uk

That link shows a different product to what @drlabman is talking about...

They are not tax free and if @drlabman was a basic tax payer, the top rate in that list (4.35%) might actually earn them 4.35*0.8=3.48% (lower than the ISA they are considering).
Obviously a lot worse if they were a higher tax payer: 4.35*0.6=2.61%

refluxer

drlabman said:

refluxer said:

How much do you have in the ISA ?

The amount is irrelevant, isn't it?  But for the sake of argument, let's play round numbers - £100K.

There are a number of ways of working out whether transfers are worth it but I prefer to use exact amounts using this online interest calculator...

£100k in a 1 year ISA taken out 70 days ago (on 22/09/22) @ 2.56% would be worth £102,560 on 21/09/23 if it was left to mature.

If you wanted to transfer that same ISA today, it would be worth £100,491 minus the 90 day penalty of £631 = £99,860.

£99,860 put into a 1 year ISA today @ 3.59% would be worth £102,767 on 21/09/23 meaning you'll be £207 better off on the date the original ISA was due to mature, if you do the transfer you mention instead.

NB. All figures rounded off for simplicity and dates have to be tweaked slightly because the calculator uses dates inclusively. Obviously check these figures against your own workings before making any decisions.

drlabman

rallycurve said:

Albermarle said:

There are better one year fix rates available.
Best 1 Year Fixed Rate Bonds Up To 4.37% Fixed | moneyfacts.co.uk

That link shows a different product to what @drlabman is talking about...

They are not tax free and if @drlabman was a basic tax payer, the top rate in that list (4.35%) might actually earn them 4.35*0.8=3.48% (lower than the ISA they are considering).
Obviously a lot worse if they were a higher tax payer: 4.35*0.6=2.61%

Indeed - which is why I'm only considering ISAs at the moment.

drlabman

refluxer said:

drlabman said:

refluxer said:

How much do you have in the ISA ?

The amount is irrelevant, isn't it?  But for the sake of argument, let's play round numbers - £100K.

There are a number of ways of working out whether transfers are worth it but I prefer to use exact amounts using this online interest calculator...

£100k in a 1 year ISA taken out 70 days ago (on 22/09/22) @ 2.56% would be worth £102,560 on 21/09/23 if it was left to mature.

If you wanted to transfer that same ISA today, it would be worth £100,491 minus the 90 day penalty of £631 = £99,860.

£99,860 put into a 1 year ISA today @ 3.59% would be worth £102,767 on 21/09/23 meaning you'll be £207 better off on the date the original ISA was due to mature, if you do the transfer you mention instead.

NB. All figures rounded off for simplicity and dates have to be tweaked slightly because the calculator uses dates inclusively. Obviously check these figures against your own workings before making any decisions.

Thanks.  £207 extra makes me think it's not worth the faff, and actually I have less than £100K so it's less than that.  Then I think to myself, if someone offered me £207 for making one phone call, I'd probably bite their hand off.

Albermarle

rallycurve said:

Albermarle said:

There are better one year fix rates available.
Best 1 Year Fixed Rate Bonds Up To 4.37% Fixed | moneyfacts.co.uk

That link shows a different product to what @drlabman is talking about...

They are not tax free and if @drlabman was a basic tax payer, the top rate in that list (4.35%) might actually earn them 4.35*0.8=3.48% (lower than the ISA they are considering).
Obviously a lot worse if they were a higher tax payer: 4.35*0.6=2.61%

You are right, my mistake.