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The fixed rate cash ISAs where savers could get back less than they put in

Emma Lunn
Written By:
Emma Lunn

Savers opening fixed rate cash ISAs have been warned they might not get all their money back if they want early access to their money.

If you take out a fixed rate ISA, the idea is that you keep your money in the account for the duration of the fixed term. The interest rates on these accounts are higher than easy access ISAs due to the fact you’re locking in your money.

All cash ISAs allow you to transfer your money into another ISA at any time. However, they don’t have to allow you to withdraw your money directly so if you need access to money held in a fixed rate ISA before the end of its term, you may have to forfeit an amount of interest.

Generally, interest penalties will see you lose a set number of days’ interest – and this can be more interest than you’ve earned already. Some ISAs charge a flat fee for early access instead, typically £50.

Early withdrawals

James Blower, founder of the Savings Guru, noted a couple of examples where savers wouldn’t get all their money back if they wanted early access to money in a fixed rate ISA.

He said: “Take the one-year ISA from Close Brothers at 2.45% which is a current best buy. Let’s assume a saver puts in £10,000. After 30 days (beyond the 14-day cooling period), they will have earned £20.14 in interest. If they want to access their money, they can only do so by early closure or transfer and will then pay an interest penalty of £60.41 for doing so. Therefore, their early closure or transfer amount will be £9,959.73, less than their original deposit.

“And it gets worse with the longer term. Take West Brom’s five-year ISA at 3.10% and let’s assume £20,000 is saved (the max allowance for the year). Again, after 30 days, they will have earned £50.96 in interest. If they want access or transfer then they will pay £407.67 as an interest penalty, so will only get £19,643.29 back or transferred.”

Is it still worth getting an ISA?

Since 2016 and the introduction of the personal savings allowance (PSA), the low interest rate environment has made ISAs far less attractive for most savers.

Under the PSA, basic rate taxpayers (20%) can earn up to £1,000 of savings income without any tax being due. Higher rate taxpayers (40%) can earn up to £500 before interest is payable.

This means many people won’t pay tax on savings interest and so savers have been better off earning higher interest rates on ordinary savings accounts than lower rates on ISAs.

However, with interest rates rising and ISA rates starting to improve, experts feel now could be the time to re-evaluate the tax-free accounts.

“Savers with cash ISAs from previous tax years should definitely look to move them to obtain better rates – for example, the best easy access cash ISA 12 months ago paid 0.54% with Cynergy Bank. Today, you can earn 1.50% with Marcus so it’s definitely worth shopping around to improve your returns,” said Andrew Hagger of Moneycomms.

“With the PSA, many people haven’t had a need for an ISA because cash savings rates have been at rock bottom, and few have been in danger of exceeding their tax-free PSA. However, the savings market has changed rapidly since the beginning of 2022 and interest rates have surged meaning many more savers will need a cash ISA to help keep all their savings income away from the taxman.”