Everything you need to know about fixed rate cash ISAs

From interest rates to access restrictions, there’s so much to consider when taking out a new savings account. Can I make withdrawals? Do I need to give notice on the account? Will I lose interest?

We've invited guest authors from the UK's most reputable savings providers to share their knowledge on the different types of savings accounts available in the UK. Each financial services provider has been asked to go back to basics and give a simple and unbiased overview of a particular type of account.

In this blog, Darren Ditchburn, from Leek Building Society, shares his knowledge on fixed rate cash ISAs. Let’s dive straight in...

What is a fixed rate cash ISA?

A fixed rate cash ISA (Individual Savings Account) is a tax-free savings account provided by banks, building societies and other financial institutions. It has two main characteristics:

Fixed interest rate

The key feature of a fixed rate cash ISA is that it offers a fixed interest rate for an agreed period, typically ranging from one to five years. Generally, the longer the term, the better the interest rate. This means you can lock away a lump sum of money in return for a competitive interest rate that will not change during this fixed term. It’s important to consider your savings goals, especially if you think you will need access to your money during the term.

Tax-free savings

Like other ISAs, the interest you earn on your savings in a fixed rate cash ISA is tax-free, meaning you don't have to pay income tax on the interest you receive. Currently, you can pay a maximum of £20,000 into an ISA in any one tax year. The interest from a fixed rate cash ISA does not count towards your personal savings allowance so it’s a great way to grow your savings tax-free. However, if tax isn’t an issue, then you should also consider other non-ISA products which may be more beneficial.

You must be aged 16 or over and be a UK resident to open a fixed rate cash ISA.

Can you pay money into a fixed rate cash ISA?

When you open a fixed rate cash ISA, usually, you can make a one-time lump sum deposit within a set amount of time. Some providers require a minimum deposit to open the account. An important point to keep in mind is that in most cases you cannot add more money to the account during the fixed term.

Can you withdraw money from a fixed rate cash ISA?

Typically, fixed rate cash ISAs do not allow you to withdraw money during the fixed term without incurring penalties or losing some or all of the interest earned. This is because fixed rate ISAs normally provide better interest rates than variable rate ISAs, with the compromise being you cannot access your money until the end of the agreed term. However, some providers may offer limited access or early withdrawal options with penalties.

It is possible to transfer a fixed rate cash ISA to another ISA provider before the maturity date, but this may involve penalties or loss of interest. Transferring a fixed rate cash ISA early is not as flexible as with other types of ISAs, like variable rate or easy access ISAs.

What do I do when a fixed rate cash ISA matures?

When your fixed rate cash ISA matures, you have several options:

You can reinvest the money into a new fixed rate cash ISA with the same or a different provider.

You can transfer the money into a different type of ISA (e.g., a variable rate or easy access ISA) without affecting your annual ISA allowance.

You can choose to withdraw the money and close the account. If you choose to do this, and your balance is higher than the annual tax-free allowance, you'll lose your previous year's tax-free allowances.

It's essential to check the terms and conditions of your specific fixed rate cash ISA and consult with your ISA provider for details on withdrawal, transfers, and maturity options, as these can vary between providers and change over time. Additionally, ISA rules and regulations can change, so it's a good idea to stay informed about the latest developments in ISA products and rules.

Can I have more than one fixed rate cash ISA?

You can have more than one fixed rate cash ISA. However, you can only open and save into one cash ISA, fixed or variable, each tax year (6 April to 5 April).

You can save into one cash ISA and another type of ISA e.g., lifetime or stocks & shares ISA in the same tax year, as long as you don't exceed the annual tax-free allowance of £20,000.

What are the pros and cons of a fixed rate cash ISA?

The pros of a fixed rate cash ISA

Tax-free savings: Like all ISAs, interest earned in a fixed rate cash ISA is tax-free, allowing you to keep more of your savings.

Higher interest rate: Fixed rate cash ISAs typically offer higher interest rates compared to easy access cash ISAs. This can provide better returns on your savings.

Rate certainty: The interest rate on a fixed rate cash ISA remains the same for the entire fixed term, providing you with predictability and protection against interest rate fluctuations.

The cons of a fixed rate cash ISA

Limited access: One of the drawbacks is limited access to your money during the fixed term. If you need to access your money unexpectedly, you might face difficulties withdrawing funds before maturity, which can result in significant penalties or loss of interest.

Rising interest rates: If interest rates rise significantly during the fixed term, you might miss out on better savings opportunities with higher interest rates.

You may be able to invest in a fixed rate ISA or a notice cash ISA, but most will require a larger amount of funds. A regular savings account may be best suited for your needs.

Need a bit more guidance when searching for the right savings account? Why not read the reviews left by our Smart Money People community?