Fixed-rate cash ISAs pay you a guaranteed amount of tax-free interest for a fixed term – usually between 1 and 5 years. The trade-off is that you can’t easily withdraw funds from a fixed-rate cash ISA.

How do fixed rate cash ISAs work?

Fixed-rate cash ISAs usually offer a better interest rate than normal cash ISAs, and the interest rate is guaranteed for the duration of the term. Today, fixed-rate cash ISAs offer an interest rate of around 2%, while cash ISAs are nearer 1%.

The caveat is that most fixed-rate ISAs will heavily penalise you if you try to withdraw your funds before the end of your fixed-rate term. Even if you only withdraw a small amount of money, you could lose 365 days of interest, for example.

How to choose the best fixed rate cash ISA

There are two key variables when looking for the best fixed-rate cash ISA: how long do you want to keep your money locked up, and how much money do you want to save in a fixed rate cash ISA this year? Your answer to those questions will then narrow down the number of available ISAs – and you’ll probably want to choose the one with the best interest rate. 

The best fixed rate ISA rates are currently on the low side, thanks to the Bank of England’s historically low base rate, but the interest may still be better than you’re getting elsewhere. You’ll also want to compare fixed rate ISAs as not only are there lots to choose from, there are lots of providers offering them.

Can anyone open a fixed rate cash ISA?

Yes – as long as you’re a UK resident over the age of 16, and you haven’t paid into another cash ISA this tax year. Some ISAs will also require you to physically visit the provider to open an account.

There are also some fixed-rate cash ISAs that are only available to existing customers – and these sometimes have higher interest rates than ISAs for new customers.

Many fixed-rate cash ISAs allow you to transfer funds from another ISA – but be aware that you’ll probably be whacked with a big penalty if you move your funds again before the end of the fixed-rate term.

Is my money safe in a fixed rate cash ISA?

Yes – as long as your fixed-rate cash ISA provider is backed by the FSCS (financial services compensation scheme), which protects up to £85,000 of your money per bank/provider/institution.

Fixed rate cash ISA FAQ

Why would I want a fixed rate cash ISA?

Fixed rate cash ISAs may not offer an exciting rate of interest, but if you’re nearing a point when you’re going to need the money you have invested, it can be a wise move to switch to a product which offers more steady locked-in returns, so that you can plan for the future. Fixed rate cash ISAs can be a great way of doing this. The returns tend to be higher than standard cash ISAs, and your investment is no longer at the mercy of the market.

How long do fixed rate ISAs last?

The investment duration required by fixed rate ISAs varies from product to product, but tend to be somewhere between 1 and 5 years.

Can I pay into a fixed rate ISA on a monthly basis?

Most fixed rate cash ISAs limit the period in which you can invest with them. Sometimes you will need to place your full investment into your account when you open it. If not, the period in which you can make transfers is usually limited to seven to 14 days from account opening.

Can I transfer from a fixed rate ISA before maturity?

In most instances, no. Where this is permitted, you are likely to suffer from early withdrawal penalties, which should make you consider your decision very carefully. That does not mean that you should stick with your fixed rate ISA come what may, but it does mean you should be sure that the benefits of withdrawing outweigh the costs.

Can fixed rate ISA interest rates change?

No. The rate you will receive is the rate advertised when you apply. This means you can plan for the future with certainty regarding your investment, but it also means that, if interest rates go up, you will not benefit from favourable changes.

Can I transfer my stocks and shares ISA to a fixed rate product?

Yes. The process is longer and slightly more complicated than transferring between cash ISA products, but it can be done. Unfortunately, you won’t know the full value of your stocks and shares ISA until your investments have been cashed in.

Can I have a cash ISA and a stocks and shares ISA?

Yes you can have a cash ISA and a stocks and shares ISA but your total contributions must not exceed the annual limit. 

Is my money protected in a fixed rate ISA?

In most instances, standard fixed rate cash ISAs are protected by the FSCS. However, be sure that the product you’re applying for is not categorised as an innovative finance ISA. These products often offer what appear to be fixed rate ISAs, but they are not covered by the FSCS, so the investment is far more speculative.

6 November 2020