As interest rates rise, savers looking to put away some money face a choice between the slightly current higher interest rates of fixed rate ISAs or the flexibility and possible rate rise of easy-access ISAs. In today’s uncertain financial climate, it is a difficult choice.

Investing an ISA will help you protect the returns on your savings from tax, but at the same time many ISAs will offer slightly lower interest rates than traditional savings accounts, so whilst your interest will be tax-free, you may earn less or more depending on your financial circumstances. And with many different types of ISA and savings accounts on the market from traditional financial institutions and challenger banks, each with their own benefits and restrictions, it pays to find out more about the right option for your circumstances.

Currently, the highest paying five-year fixed-rate ISAs will offer savers two per cent interest on their savings of up to £20,000 per year. At first glance, it might seem that that these accounts will earn you significantly more than a traditional savings account or easy-access ISA, which works in a similar way but protects profits from tax, with their interest rates at least 0.5% less.

However, with the Consumer Prices Index (CPI) rising by 7.0% in the 12 months to March 2022, and the Bank of England rumoured to be looking at another rate rise in the comings months, limiting your interest rate to two per cent for the next five years may not turn out to be the best decision.

It is difficult to predict what the interest rate will do over the next five years, but with current easy-access ISAs offering rates at around one per cent, it is possible that these accounts may offer rates of over two percent in the next couple of years, and you also have the bonus of always having instant, or near-instant, access to your cash along with the tax protection on any interest earned. However, it is important to note that any changes to the bank of England base rate may not be passed along to savers.

Every year, you have until midnight on 5 April to save up to £20,000 into your ISA allowance, which includes ISAs of any type including easy-access and fixed-term cash ISAs, stocks and shares ISAs and more. The allowance does not carry over, so if you only save £10,000 this year, you will still only be able to save £20,000 in an ISA the year after.

Some experts have argued that cash ISAs have lost their value since the 2016 introduction of the “personal savings allowance”, which allows basic income tax-rate payers to receive up to £1,000, and top-rate taxpayers receive up to £500, in interest each year before needing to pay tax, but everyone’s situation is different. Additionally, ISAs allow you to move the balance between ISAs each year, so a cash ISA could be changed into a stocks and shares ISA if desired and vice-versa.


This article is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this article constitutes a solicitation, recommendation, or endorsement of any financial product or service.


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