Fixed Rate Cash ISA Withdrawal Penalty Calculation

wisdenfan

With Cash ISA interest on the rise, I have started to think about some of my existing Cash ISA and whether to move them or not. While I was thinking about it, a question came to my regarding how the withdrawal penalty is calculated for a Fixed Rate Cash ISA. Let me give you an example to illustrate my question:

Let's say that I go for 5 Year Cash ISA at 4%, and I open that Cash ISA with £20,000. The T&C states that this "Withdrawals within the fixed term period will be subject to a reduction in interest of 365 Days." I choose to put the interest back into the Cash ISA, so it gets compounded.

Now let's say that 2 years have passed. At the end of the two years, I have a total of £21,632 in my Cash ISA account (£800 of interest in 1st year, followed by £832 interest in 2nd year). Let's say I want to transfer the whole amount to a new Cash ISA. As per the T&C, I will be charged a penalty of 365 days worth of interest. And here is my question, how is this interest/penalty is going to be calculated? Will it be calculated as 4% on top of current value of Cash ISA, i.e. 4% of £21,632 = £865.28? Or will it be calculated as 4% on top of the original investment amount, i.e. 4% of £20,000 = £800?

I've tried to look for this information, but don't seem to find anything clear cut on this yet.

Any advice on this will be highly appreciated!

eskbanker

You'd need to check the Ts & Cs of any specific product about which you have this query, but my expectation would be that the calculation would normally be based on the value of the withdrawal.

wisdenfan

https://forums.moneysavingexpert.com/discussion/comment/82139948#Comment_82139948

Thank you eskbanker, that was my working assumption too.

masonic

That's very odd language to use. Typically wording would be something like a penalty equivalent to x days interest on the sum withdrawn.

If "Withdrawals within the fixed term period will be subject to a reduction in interest of 365 Days" what happens if you withdraw after a month? Making a withdrawal already results in a reduction in interest for the full remaining term. That's how interest works. But if the requisite amount of interest hasn't yet been earned, they haven't given themselves options regarding the penalty.

T&Cs are hopefully written more clearly.

slinger2

You'd think it would be 4% of the amount currently in the account (£21,632).

I looked at Nationwide but they don't make it too clear. The "Early access charge" is "Equivalent to 300 days’ interest" (in their case). "When you close your account, you can take out the money in it, plus any interest you’ve earned, minus any early access charge. If the early access charge is more than the interest you’ve earned, you’ll get back less money than you paid into your account." So if you close it within the first year (300 days in their case) you wouldn't even get your £20k back.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82140176#Comment_82140176

That implies partial withdrawals are not allowed, which is not unusual.

Edit: the summary box makes this clear: