Everything you need to know about
a fixed rate ISA

With interest rates currently set very low, you may want to consider locking away your savings for a set period to secure a higher rate. A fixed rate ISA could enable you to do this – plus any interest you earn is tax-free.

In this article, you’ll learn more about fixed rate ISAs and how they work. We also weigh up the pros and cons and consider whether it’s better to open a fixed rate ISA or a fixed rate bond. 

Of course, the most suitable option will depend on your savings goals and individual circumstances, so it’s worth comparing a range of products to find the best solution for your needs.

A fixed rate ISA is a tax-free savings account that allows you to lock away a lump sum of money for a fixed period in exchange for a competitive interest rate. The interest rate is agreed in advance and remains the same for the duration of the term. Terms normally range from one year to five years, with longer terms typically offering the highest interest rates. In this sense, fixed rate ISAs are very similar to fixed rate bonds. 

You can currently pay a maximum of £20,000 into a fixed rate ISA in any one tax year. While it’s possible to own multiple ISAs, the £20,000 limit applies across your ISA accounts as a whole. It’s also worth noting that interest from a fixed rate ISA – or any other type of ISA – does not count towards your personal savings allowance (PSA). The PSA lets you earn a certain amount of interest on your savings without paying tax. Basic rate taxpayers can currently earn up to £1,000 in tax-free interest, while higher rate taxpayers can receive up to £500 in interest. Additional rate taxpayers do not receive a PSA.

The main requirements to open a fixed rate ISA are that you’re aged 16 or over and resident in the UK.

Some providers require you to make a minimum deposit to open a fixed rate ISA. This can vary from between £1 and £1,000. Once you’ve opened a fixed rate ISA, you’ll have up to 14 days to deposit your lump sum. Some fixed rate ISAs won’t allow you to make additional top-up payments during the term, so keep this in mind when choosing an account.

When making your deposit, remember to take account of any money you’ve already paid into other ISAs during that tax year as you can’t exceed the maximum allowance of £20,000. That said, it may be possible to transfer funds from one ISA into your new fixed rate ISA without this counting towards the annual limit. Not all providers accept transfers from existing ISAs, so it’s important to check this before opening your account.

While fixed rate ISAs typically offer better interest rates than cash ISAs, the compromise is that you can’t access your money until the end of the agreed term. If you do need to withdraw funds before the account matures, you are likely to incur a significant penalty.

Fixed rate ISAs are categorised by the length of the term they carry. Typical terms are one year, two years, three years, four years and five years. As a rule of thumb, the longer the term, the better the interest rate. The length of time you choose to invest your money depends on your financial goals and whether there’s a chance you’ll need to access your savings before the account matures. Whatever you decide, it’s a good idea to review your budget so you know exactly how much you can afford to lock away and for how long.

You may also want to factor in potential interest rate changes when making your decision. Interest rates are currently relatively high, so locking in your money at a competitive rate could prove a good decision right now. Of course, interest rates may continue to rise or begin to fall again in the future, so it’s important to take this into consideration when opening a long term savings account.

It’s worth remembering that fixed rate ISAs aren’t the only type of ISA available. If you’re looking for a flexible way to save, an instant access cash ISA may be more suitable. Bear in mind, however, that the return on your investment will be lower, as shown in the table below.

You can have multiple fixed rate ISAs but you can only open one of each type of ISA in any given tax year (6th April to 5th April). So if you open a fixed rate ISA in July 2021, you won’t be able to open another one until 6th April 2022. 

You can, however, open a different type of ISA, for example, a cash ISA and a stocks and shares ISA in the same tax year, providing you don’t exceed the overall ISA allowance (£20,000 in 2021/22).

As with any savings account, a fixed rate ISA has its pros and cons.

Pros

• You won’t be taxed on the interest you earn 
• You’ll receive a guaranteed rate of interest for the duration of the term
• The interest rates are typically higher than those available on cash ISAs and other easy access savings account
• They’re free to open and you can have multiple accounts
  

Cons

• You may incur a sizeable penalty if you need to access your money before the end of the agreed term
• Annual deposits are capped at £20,000
• You won’t benefit if interest rates rise while you’re locked into a fixed rate ISA 

If you need help to find the best fixed rate ISA or you’re unsure whether it’s the most suitable option, speak to a financial adviser.

Whether a fixed rate ISA is right for you depends on your savings goals and your circumstances. 

A fixed rate ISA may be suitable for saving a lump sum of money that you know you won’t need to touch during the term. For example, if you’re saving for a wedding that’s booked for three years’ time, you might want to lock away the money until you know you’ll need it. However, if you’re saving for a rainy day and there’s a chance you need to access the funds sooner, you may be better suited to a cash ISA or an easy access savings account.

You should also factor in your financial situation. If you have substantial savings and your interest exceeds the personal savings allowance (PSA), a fixed rate ISA can provide you with a tax-free way to grow your savings. However, if the PSA means tax isn’t likely to be an issue, other non-ISA products like fixed rate bonds may be more beneficial.

If you do decide a fixed rate ISA is suitable, be sure to research the market to find the best fixed rate ISA deals that are available. 

Fixed rate bonds operate in the same way as fixed rate ISAs in that they provide a guaranteed rate of return if you lock your money away for a set period. The main difference is that the interest earned in a fixed rate ISA is tax-free, regardless of your income. As the two types of account are similar, you may be wondering whether it’s better to open a fixed rate ISA or a fixed rate bond. 

If you’re in the estimated 95% of savers who won’t need to pay tax on their savings, it makes sense to consider a fixed rate bond. They’re still risk-free and you may be able to secure a more competitive interest rate. If you have significant savings, you might want to open a fixed rate ISA and a fixed rate bond, particularly if you’ve reached the annual ISA limit. Unlike fixed rate ISAs, there’s no £20,000 cap on deposits into a fixed rate bond – in some cases the maximum deposit can be as much as £2,000,000.

Whichever type of savings account you choose, it’s a good idea to compare products from a range of providers to ensure you are getting the best deal.

While we don’t currently offer ISAs, you’ll find a great range of fixed rate bonds available on the Raisin UK marketplace. Simply register for a Raisin UK account to apply online for fixed rate bonds with competitive interest rates from a range of UK partner banks. It only takes a few clicks and it’s completely free.

You can learn more about how to apply by reading our guide to opening a fixed rate bond.