Sunday, 25 March 2012

Should you fix your cash ISA rate?

ISAs, like all other savings accounts, are offering fairly meagre returns at the moment, with the best easy-access account on the market paying 3.10% on £1,000 or more.

You could earn 4.20% if you are prepared to lock your savings away for five years. But is it worth it in the long run? We investigate. 

You can put up to £5,340 into a tax-free cash ISA this tax year. And with the countdown to the end of the 2011/2012 tax year well underway, anyone yet to take advantage of their allowance is likely to be looking for the best account. But which account should you go for?

Easy-access cash ISAs 
The best easy-access cash ISA currently on the market - according to comparison website MoneySupermarket - is the Nationwide Building Society Online ISA. It pays a headline interest rate of 3.10%, which includes a bonus of 2.90% lasting until the end of September 2013.

Benefits of the account, which can only be managed online, include that you get make withdrawals at any time and that you can transfer in cash built up with other ISA providers over the years. 

Potential disadvantages include that you must have at least £1,000 to open the account and that you will need to have a Nationwide card account to qualify. It is also worth pointing out that the large bonus included in the advertised interest rate will probably mean that you need to switch again next year to avoid missing out.

Other accounts worth considering include the ING Direct Cash ISA, which pays 3.00% and can be opened with just £1. The interest rate on this account does not include a bonus.

However, it is only guaranteed for 12 months, which means that it may become less competitive after this time.

Fixed-rate cash ISAs 
The Halifax ISA Saver Fixed, which has a five-year term, pays a generous 4.20% on £500 or more.

It accepts transfers in from other ISA providers and account holders with balances of at least £5,000 also qualify for the Halifax Savers Draw, through which 10 customers will win £100,000 in May.

However, you cannot make any withdrawals or deposits during the five-year term, and anyone needing to close the account early to access their cash will forfeit 365 days' interest.

Those looking for a new home for ISA savings built up in previous tax years, meanwhile, could earn 3.90% with the NatWest/RBS Preferential Fixed Rate ISA. It lasts for two years and requires a minimum deposit of £1,000 - which must be transferred from a rival ISA provider.

Which should you go for? 
You can only have one cash ISA for a particular tax year's allowance. So for anyone planning to add regularly to their ISA savings pots, the main disadvantage of the fixed-rate accounts mentioned above is that they do not allow additional deposits.

Those signing up for the Halifax account, for example, would therefore have to pay in the full £5,340 in one go to avoid missing out on some of their allowance - unless, of course, they decide to close the account and pay the price in loss of interest.

Despite the higher rates, longer-term fixed rate accounts should also be approached with caution as interest rates will start going up at some point, probably within the next five years.

You may, however, like the idea of a shorter-term fixed-rate account if you do not want to be tempted to dip into the pot you have built up so far.

Otherwise, one of the best easy-access accounts is probably the best option - as long as you keep an eye on the rate and switch away if it becomes uncompetitive.

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