Is the fixed rate Virgin ISA better than the variable - maths question

purplestar133

I've been away from ISAS and this forum for a long time (and ignoring the 'new post in a thread you subscribed to' emails for years and years), but think I am close to going over the PSA limit so I am back to looking at ISAs.

Can someone help me with some maths? I'm interested in the Virgin Money 3% ISA (I'm a current account customer). I'm also interested in the 1 year fixed rate from Virgin Money for current account customers at 4.25%. I'm pretty sure I will be spending my savings this year and will need to withdraw. The penalty is 60 days interest to withdraw from the fixed rate. If I factor in the 60 day penalty, would I still earn more interest from the fixed rate ISA, or shall I stick with the open access one? 

If someone could help me with how to do the sum, I'll keep it for reference so I don't ask this basic question again later...

eskbanker

It all depends on when you'd need to access the money - if it was after 60 days then you'd earn 0% in the fixed rate product, but if it was close to the full year then the net effective rate would be nearer 3.5% (as 60 days represents about a sixth of the annual interest).  If you're confident that you wouldn't need the money until about Christmas then you'd win slightly with the fixed rate one, but otherwise stick to the easy access one....

Edit: rushed the answer and got it wrong!  The fixed rate wins beyond 204 days, based on 60 * 4.25% / (4.25% - 3%), or the equivalent using gross rates instead of AER may give a very slightly different result.

Johnjdc

This might be a stupid question but are all the savings which are pushing you over the PSA stuck in long-term fixed rate accounts? If not, can't you withdraw from those rather than from the ISA? Or contribute to the ISA as and when you can, but keep enough in a 3% instant access account to meet your liquidity needs?

On your substantive question, if you put £20k in at the start of the tax year and take £20k out in a lump sum, it becomes worth paying the 60 day penalty for the higher rate if your withdrawal is later than early November, give or take.

purplestar133

Johnjdc said:

This might be a stupid question but are all the savings which are pushing you over the PSA stuck in long-term fixed rate accounts? If not, can't you withdraw from those rather than from the ISA? Or contribute to the ISA as and when you can, but keep enough in a 3% instant access account to meet your liquidity needs?

On your substantive question, if you put £20k in at the start of the tax year and take £20k out in a lump sum, it becomes worth paying the 60 day penalty for the higher rate if your withdrawal is later than early November, give or take.

They're in variable rate savings accounts but I will need the whole lot (house deposit). I was only thinking of putting a maturing regular saver into the ISA and leaving the main bulk of my savings in the variable rate but that's at 2 something% but 20 of that would be better in the ISA now I think of it. It's complicated by me not knowing exactly where I am with the PSA as interest rates have changed so much and I haven't had the same amount in savings all year...so can't quite work out if I've hit the tax free limit yet.

Variable rate ISA it is as I will probably need to withdraw before November!

purplestar133

eskbanker said:

It all depends on when you'd need to access the money - if it was after 60 days then you'd earn 0% in the fixed rate product, but if it was close to the full year then the net effective rate would be nearer 3.5% (as 60 days represents about a sixth of the annual interest).  If you're confident that you wouldn't need the money until about Christmas then you'd win slightly with the fixed rate one, but otherwise stick to the easy access one....

Edit: rushed the answer and got it wrong!  The fixed rate wins beyond 204 days, based on 60 * 4.25% / (4.25% - 3%), or the equivalent using gross rates instead of AER may give a very slightly different result.

Thank you!

Wheres_My_Cashback

purplestar133 said:

I've been away from ISAS and this forum for a long time (and ignoring the 'new post in a thread you subscribed to' emails for years and years), but think I am close to going over the PSA limit so I am back to looking at ISAs.

Can someone help me with some maths? I'm interested in the Virgin Money 3% ISA (I'm a current account customer). I'm also interested in the 1 year fixed rate from Virgin Money for current account customers at 4.25%. I'm pretty sure I will be spending my savings this year and will need to withdraw. The penalty is 60 days interest to withdraw from the fixed rate. If I factor in the 60 day penalty, would I still earn more interest from the fixed rate ISA, or shall I stick with the open access one? 

If someone could help me with how to do the sum, I'll keep it for reference so I don't ask this basic question again later...

As already said, the winner will depend on how long you intend to keep the funds before needing them, but that is based on todays rates. The 3% variable rate may increase which would mean the gap narrowing all the time and it could be more advantageous to stick with the variable at a lower rate.

RG2015

One consideration worth mentioning is that the 3% easy access Virgin Money account is flexible.

You can add and remove money as much as you need to within the tax year and still retain its ISA status. You can also carry it forward to the next tax year without affecting the £20k allowance for that year.

Qyburn

60 days interest @4.25% pa comes to a smidge under 0.70%.

So to break even you need to keep money in the fix until it's earned 3.70% which is 3.70/4.25x365=317 days.

Qyburn

Also note the Virgin "One year" is actually fixed until 31/01/2024, so not quite a whole year now.

RG2015

Qyburn said:

60 days interest @4.25% pa comes to a smidge under 0.70%.

So to break even you need to keep money in the fix until it's earned 3.70% which is 3.70/4.25x365=317 days.

It is 204 days for breakeven. You should look at @esbbanker 's earlier post for the calculation.

For £10,000  it is

£10,000 x 3.00% x 204 / 365 = £167.67

Compared with

£10,000 x 4.25% x 204 /365 = £237.53  minus  £69.86 = £167.67 

 (£10,000 x 4.25% x 60 / 365 = £69.86)

Qyburn

Cheers, spotted my error now, I wasn't accounting for the part-year on the instant access.