Cash ISA questions

Harribo1

I have held a S&S ISA that I've cashed out of as I'm looking to take advantage of the current very favourable fixed rates vs increasingly uncertain returns in shares/index funds.

For context:

- Main goal is to build up capital balance to ideally eventually draw down a tax-free income to bridge gap between early retirement and Private Pension (if interest rates go back down I'd look at a fairly conservative dividend fund)
- The investment horizon is 5-10 years (ish) - I'm 37 and would like to retire around 45.
- I'm comfortable with locking the cash away for an extended period for a good return.

My questions are:

- What are interest rates likely to do in the next few months and is it worth holding out for a better rate? At the time of writing, Newcastle BS have a 2-year fix @ 4.4% which is very tempting.

- (Silly question alert!) If I do invest now and lock in for say 2 years does the 'penalty' that is referenced of x months interest mean that you simply forfeit or don't receive it? Or are you actually on the hook for it (e.g. they deduct it from the balance) ?

refluxer

Harribo1 said:

- (Silly question alert!) If I do invest now and lock in for say 2 years does the 'penalty' that is referenced of x months interest mean that you simply forfeit or don't receive it? Or are you actually on the hook for it (e.g. they deduct it from the balance) ?

I don't have any personal experience of doing this but my understanding is that they deduct the penalty from your balance. This means that if you were to transfer the whole lot after a period of time that was less than the penalty, you would get back less than you put in.

You'll have read a lot about cash ISA transfers here in the last year or so because many people were locked in at really low (Covid and post-Covid) rates and the difference between those low rates and the (now much higher) current rates meant that transferring made financial sense. I would imagine this is less likely to occur with any fixed rate cash ISAs taken out now (now that rates appear to be topping out) but at least you have the option should rates soar again in the future.

Expotter

In answer to your questions, as far as interest rates go, the consensus seems to be that they will increase a bit more maybe another 0.5% and then start to fall again, but I guess it'll depend on what happens to inflation. Even if they increase though, it doesn't mean fixed term rates will increase any further as they are already anticipating what will happen (and banks are probably more clued up than you or I could ever be).

And for penalties when transferring out of fixed term ISAs, they deduct whatever amount from the balance, you could even end up with less than you put in in the first place if you pull out very early on.

TiVo_Lad

Harribo1 said:

- What are interest rates likely to do in the next few months and is it worth holding out for a better rate? At the time of writing, Newcastle BS have a 2-year fix @ 4.4% which is very tempting.

Keep an eye on the Fixed Rate Board here as the current best rate for a two year fix is 4.91% from Close Brothers. Newcastle are way off the mark.

refluxer

TiVo_Lad said:

Harribo1 said:

- What are interest rates likely to do in the next few months and is it worth holding out for a better rate? At the time of writing, Newcastle BS have a 2-year fix @ 4.4% which is very tempting.

Keep an eye on the Fixed Rate Board here as the current best rate for a two year fix is 4.91% from Close Brothers. Newcastle are way off the mark.

That's actually for a (non-ISA) fixed rate account - their ISA fixed rates are much lower

Expotter

TiVo_Lad said:

Harribo1 said:

- What are interest rates likely to do in the next few months and is it worth holding out for a better rate? At the time of writing, Newcastle BS have a 2-year fix @ 4.4% which is very tempting.

Keep an eye on the Fixed Rate Board here as the current best rate for a two year fix is 4.91% from Close Brothers. Newcastle are way off the mark.

They're the top rate fixed ISA, which I thought was what the OP was talking about.

TiVo_Lad

As the OP hasn't indicated their Tax situation, a fixed rate bond should be part of their consideration.

saajan_12

Harribo1 said:

I have held a S&S ISA that I've cashed out of as I'm looking to take advantage of the current very favourable fixed rates vs increasingly uncertain returns in shares/index funds.

For context:

- Main goal is to build up capital balance to ideally eventually draw down a tax-free income to bridge gap between early retirement and Private Pension (if interest rates go back down I'd look at a fairly conservative dividend fund)
- The investment horizon is 5-10 years (ish) - I'm 37 and would like to retire around 45.
- I'm comfortable with locking the cash away for an extended period for a good return.

My questions are:

- What are interest rates likely to do in the next few months and is it worth holding out for a better rate? At the time of writing, Newcastle BS have a 2-year fix @ 4.4% which is very tempting.

- (Silly question alert!) If I do invest now and lock in for say 2 years does the 'penalty' that is referenced of x months interest mean that you simply forfeit or don't receive it? Or are you actually on the hook for it (e.g. they deduct it from the balance) ?

No one knows for sure. The banks seem to expect they'll remain roughly flat in the next 2 yrs based on the 1yr and 2yr fixes being about the same level. Whether thats flat or up a bit and back down over the coming months.. 
[In an increasing market you'd expect 2yr fixes to be higher than 1yr and vice versa for a rate decreasing market]

Band7

TiVo_Lad said:

As the OP hasn't indicated their Tax situation, a fixed rate bond should be part of their consideration.

Assuming the OP are at least a BR tax payer right now, and ignoring the PSA, they would need to find a fixed rate account paying at least 5.5% before it beats the 4.4% ISA. If they are a HR tax payer, it would have to be 7.3%. Both rather unlikely to appear any time soon IMO

Albermarle

 The investment horizon is 5-10 years (ish) -
- I'm comfortable with locking the cash away for an extended period for a good return.

As your pension will not be available for about 20 years, the normal advice would be to stay invested. Despite the current situation with savings interest rates, you are more likely to gain by staying invested over that period.

s increasingly uncertain returns in shares/index funds.

Why do you say that? Investments returns have always been uncertain and always will be, but in the long run they are the only game in town to beat inflation.( hopefully) 

I'm 37 and would like to retire around 45.

45 is exceptionally young to retire I must say !

GrubbyGirl_2

The banks are clearly expecting rates to fall in the medium term as 5 year rates have been gradually going down