1, 2, 3 or 5 year fixed rate Cash ISA - What to go for

SickGroove

Good evening

With the current interest rate remaining stable, what are people's thoughts on interest rates over the next 5 years?

Fully appreciate it's a crystal ball situation but I've about 80K to mature shortly with Shawbrook & unsure how long to re-fix for. Money won't be needed & monthly interest is being compounded until it gets to just under £85K then the monthly interest will be paid away.

All thoughts welcome.

Cheers

cricidmuslibale

Good morning 

My understanding (from what I’ve read in recent financial news) is that is now likely, albeit not certain, that the Bank of England base rate, currently 5.25%, is either at or very close to its peak, with at most one further 0.25% rise to come, and that rise will only occur if core inflation in particular starts to rise again. Ironically inflation as measured by the Retail Price Index did actually rise slightly to 9.1% in the latest figures (for August) and CPI inflation fell only very slightly to 6.7%, which is why the majority of financial experts, and very probably the majority of savings providers, expected the Bank of England to raise the base rate by 0.25% last Thursday rather than keep it unchanged!

As for over the next five years, from what I’ve read it appears that the B of E base rate is most likely to remain at 5.25% for the next few months before being reduced gradually from mid 2024 onwards and then stabilising somewhere between 2.5% to 3.5% by the end of 2025. Beyond that it is very hard at this stage to be sure what will happen; even the gradual decline I’ve just outlined is far from set in stone and a lot will depend on how stable or otherwise the British economy is, plus of course whether there are further global shocks such as the Ukraine war which lead to global energy and food price increases. Interest rates in general are likely to follow the direction of travel of the base rate, as you probably already know.

With all that in mind, I would naturally prefer to create a personal ladder of fixed rate ISAs lasting from 1 to 5 years, with roughly equal amounts of previous years cash ISA contributions saved into each fix. However at the moment the best interest rate on offer for 4 and 5 year fixed rate ISAs is Zopa’s 5.26%, which is not high enough for me, and more importantly these Zopa fixes don’t allow any incoming transfers. Therefore I’m restricting myself to a ladder of fixed rate ISAs that last from 1 to 3 years; so far I’ve taken out a 1 year 5.85% fix with Virgin Money and an 18 month 5.70% fix with Skipton Building Society. I’m now keen to find suitable 2 and 3 year fixes within the next few weeks at most and maybe within a few days if I sense that interest rates on these medium term fixed ISAs will continue to decline as they have recently.

I hope all this is helpful. Best wishes whatever you decide to go for!

savit4l8er

@cricidmuslibale

That's got to be worth a thank you. 🙏


Edit.

Just to mention should anyone look, appears like the Skipton 18 month has been withdrawn, it was a nice one. 

SickGroove

Thanks for you're extremely detailed response @cricidmuslibale 

So, as rates are forecast to drop, rather than increase over the next few years, I might just plump for the Shawbrook 3 year fixed at 5.38% Monthly.

I'm already with them & they've confirmed I can switch from compound to paid away interest once I get just below the £85K figure.

Albermarle

Money won't be needed

If it is likely that some/all of the money will not be needed for many years, you should consider investing some/all of it for the long term. In a pension maybe or Stocks and shares ISA.

Once you get past 7 years, historical data shows the balance swinging significantly towards investments rather than cash. After 10 years even more so.

refluxer

SickGroove said:

Thanks for you're extremely detailed response @cricidmuslibale 

So, as rates are forecast to drop, rather than increase over the next few years, I might just plump for the Shawbrook 3 year fixed at 5.38% Monthly.

I'm already with them & they've confirmed I can switch from compound to paid away interest once I get just below the £85K figure.

I obviously don't know your personal circumstances, but are you sure that having interest paid away once you reach £85k is the best solution to the FSCS limit problem ?

£80k @ 5.51% AER with Shawbrook for 3 years will reach £85k in just over a year and having it paid away beyond that will generate around £4.5k PA - the interest from which would subsequently, potentially be liable to tax so, as you're someone who appears to take full advantage of their ISA allowance, wouldn't it be better to retain that interest within an ISA ?

If you broke that unwieldy £80k into £20k chunks once the current fixed rate matures, then you could spread your bets and take out a 1, 2, 3 and 5 year fixed rate and doing this with at least 2 different providers would ensure you stay well under the £85k limit. Even if you just decided to open 2, split the £80k in half and transferred half elsewhere, you wouldn't have to worry about the FSCS limit for at least a few decades !

Doing this is actually pretty straight forward - you just check that your fixed rate ISA defaults to an easy access account on maturity if you don't submit any maturity instructions (my Shawbrook fixed rate ISA defaults to an easy access 'Cash ISA Matured Funds account') and then, once this happens, you can open the new ISAs and request the transfers from that Matured Funds ISA account. It is actually possible to open the new ones before the existing Shawbrook ISA matures, but you just need to make sure you get the transfer timings right so that funds aren't withdrawn early - there is normally an option to either transfer after maturity or to request a specific date on the transfer form so I would make sure this at least a day or two after the maturity date just to be on the safe side. 

Another benefit of going down that route is that it then allows you to open other types of account with the same provider. Shawbrook's easy access account (for example) pays a good rate of interest and this would become available to you if you transferred some of the Shawbrook ISA funds elsewhere.

Just something to think about anyway.

SickGroove

refluxer said:

SickGroove said:

Thanks for you're extremely detailed response @cricidmuslibale 

So, as rates are forecast to drop, rather than increase over the next few years, I might just plump for the Shawbrook 3 year fixed at 5.38% Monthly.

I'm already with them & they've confirmed I can switch from compound to paid away interest once I get just below the £85K figure.

I obviously don't know your personal circumstances, but are you sure that having interest paid away once you reach £85k is the best solution to the FSCS limit problem ?

£80k @ 5.51% AER with Shawbrook for 3 years will reach £85k in just over a year and having it paid away beyond that will generate around £4.5k PA - the interest from which would subsequently, potentially be liable to tax so, as you're someone who appears to take full advantage of their ISA allowance, wouldn't it be better to retain that interest within an ISA ?

If you broke that unwieldy £80k into £20k chunks once the current fixed rate matures, then you could spread your bets and take out a 1, 2, 3 and 5 year fixed rate and doing this with at least 2 different providers would ensure you stay well under the £85k limit. Even if you just decided to open 2, split the £80k in half and transferred half elsewhere, you wouldn't have to worry about the FSCS limit for at least a few decades !

Doing this is actually pretty straight forward - you just check that your fixed rate ISA defaults to an easy access account on maturity if you don't submit any maturity instructions (my Shawbrook fixed rate ISA defaults to an easy access 'Cash ISA Matured Funds account') and then, once this happens, you can open the new ISAs and request the transfers from that Matured Funds ISA account. It is actually possible to open the new ones before the existing Shawbrook ISA matures, but you just need to make sure you get the transfer timings right so that funds aren't withdrawn early - there is normally an option to either transfer after maturity or to request a specific date on the transfer form so I would make sure this at least a day or two after the maturity date just to be on the safe side. 

Another benefit of going down that route is that it then allows you to open other types of account with the same provider. Shawbrook's easy access account (for example) pays a good rate of interest and this would become available to you if you transferred some of the Shawbrook ISA funds elsewhere.

Just something to think about anyway.

Thanks for that definitely food for thought...

I've also got a separate 20K 1 year fixed ISA that matures next April with Charter too as that was funded with 23/24 allowance...

The maturing one with Shawbrook is made up of previous years ISAs so I guess I can transfer/split to that amount as you suggest between a few ISA providers once Shawbrook account matures into an easy access ISA?

Just a quick question regarding tax...I thought any interest payments from ISAs are completely tax free, so can you clarify when you say I might be liable for tax if monthly ISA payments are paid away once £85K threshold ISAs met?

Cheers

refluxer

SickGroove said:
The maturing one with Shawbrook is made up of previous years ISAs so I guess I can transfer/split to that amount as you suggest between a few ISA providers once Shawbrook account matures into an easy access ISA?

Yes, if that ISA contains contributions from previous tax years then you can split that up however you like, subject to the T&Cs of the ISA.

The Shawbrook fixed rate account I've got maturing in a few months definitely defaults to an easy access 'matured funds' ISA so yours is likely to be the same but, as always, do read the T&Cs of your account to make sure. That particular account allows partial transfers out - you'd just need to make sure that any new ISAs you open allow partial transfers in.

SickGroove said:

Just a quick question regarding tax...I thought any interest payments from ISAs are completely tax free, so can you clarify when you say I might be liable for tax if monthly ISA payments are paid away once £85K threshold ISAs met?

The interest paid away will be tax-free - what I meant was that any interest generated from that money from then on would obviously be outside of an ISA and therefore potentially liable to tax in the future.

If you don't need interest generated within an ISA to be paid away as income, then retaining it within the ISA (and therefore allowed your ISA pot to grow over time) would presumably be desirable.

SickGroove

refluxer said:

SickGroove said:
The maturing one with Shawbrook is made up of previous years ISAs so I guess I can transfer/split to that amount as you suggest between a few ISA providers once Shawbrook account matures into an easy access ISA?

Yes, if that ISA contains contributions from previous tax years then you can split that up however you like.

The Shawbrook fixed rate account I've got maturing in a few months definitely defaults to an easy access 'matured funds' ISA so yours is likely to be the same but, as always, do read the T&Cs of your account to make sure.That particular account allows partial transfers out - you'd just need to make sure that any new ISAs you open allow partial transfers in.

SickGroove said:

Just a quick question regarding tax...I thought any interest payments from ISAs are completely tax free, so can you clarify when you say I might be liable for tax if monthly ISA payments are paid away once £85K threshold ISAs met?

The interest paid away will be tax-free - what I meant was that any interest generated from that money from then on would obviously be outside of an ISA and therefore potentially liable to tax in the future.

If you don't need interest generated within an ISA to be paid away as income, then retaining it within the ISA (and therefore allowed your ISA pot to grow over time) would be desirable..

Great, thanks for clarifying the tax paid away issue as I had a mild panic attack, thinking my isa interest is taxable! 

One final question, do you know if you can split maturity options with Shawbrook? IE fixing say 20K into a new one year fix with them, but letting the remaining £60K go onto their easy access cash ISA account, thus splitting the other 3 lots of 20K (for example) once the current ISA matures..

refluxer

SickGroove said:
One final question, do you know if you can split maturity options with Shawbrook? IE fixing say 20K into a new one year fix with them, but letting the remaining £60K go onto their easy access cash ISA account, thus splitting the other 3 lots of 20K (for example) once the current ISA matures..

I'm afraid I don't know the answer to that one - my current fixed rate Shawbrook ISA is the first of this type that I've held with them, so I don't know what the maturity options are.

One thing to note is that the interest rate of the 'matured funds' ISA is likely to be very low, so you ideally don't want funds hanging around in there for too long. If you thought there was a chance that this might happen, then requesting the balance of the matured fixed rate ISA is transferred to their Easy Access ISA would be an alternative option and likely to ensure you get a better rate. You'd just need to read the T&Cs of their Easy Access ISA to ensure it would meet your needs (in terms of partial transfers out etc). As it's a fairly straight-forward easy access ISA then it should do, but you'd need to check.

SickGroove

refluxer said:

SickGroove said:
One final question, do you know if you can split maturity options with Shawbrook? IE fixing say 20K into a new one year fix with them, but letting the remaining £60K go onto their easy access cash ISA account, thus splitting the other 3 lots of 20K (for example) once the current ISA matures..

I'm afraid I don't know the answer to that one - my current fixed rate Shawbrook ISA is the first of this type that I've held with them, so I don't know what the maturity options are.

One thing to note is that the interest rate of the 'matured funds' ISA is likely to be very low, so you ideally don't want funds hanging around in there for too long. If you thought there was a chance that this might happen, then requesting the balance of the matured fixed rate ISA is transferred to their Easy Access ISA would be an alternative option and likely to ensure you get a better rate. You'd just need to read the T&Cs of their Easy Access ISA to ensure it would meet your needs (in terms of partial transfers out etc). As it's a fairly straight-forward easy access ISA then it should do, but you'd need to check.

So, I bizarrely received 4 separate maturity emails at the exact same time yesterday from Shawbrook, typically on the day their rates were slashed so their current rates are all I've got to choose from... Gutted!

So I'm now thinking of just splitting the maturing £80K into 20K or £40K chunks & giving maturity instructions to Shawbrook to go onto their Easy Access Cash ISA - Issue 25 as it doesn't actually state what will happen to the maturing funds if you just do nothing... Last thing I want is for the funds to end up in my nominated account as I'll obviously lose the tax wrapper...

Only thing is the Shawbrook Easy Access Cash ISA - Issue 25 doesn't
mention about transferring out to other ISA providers... Just states all withdrawals will need to go back into my nominated account & info below our is about transfers in, but nothing about transfers out...

Transfers in from other Cash ISA or Stocks and Shares ISA providers are permitted.
Requests to transter funds into an account from another ISA provider must be made at the same time as your initial account application. Simply provide the details of your existing ISAs during the application process and sign and return the ISA transfer form to Shawbrook Bank. Requests received after your initial account application may be refused.