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Whether you’re planning for retirement, to buy a new car, or you simply want a buffer for any unexpected expenses, a cash ISA can help – and you won’t have to worry about tax on your savings interest.
There are various different types of cash ISA to choose from, but two common options are easy access cash ISAs and fixed term cash ISAs. Both protect your savings from tax, but they each come with distinct features and benefits, and getting to grips with their differences can help you decide which type of cash ISA is likely to best suit your financial objectives.
Here, we explain how fixed term and easy access cash ISAs work, and why you don’t necessarily have to restrict yourself to one or the other.
How do easy access cash ISAs work?
An easy access cash ISA, as the name suggests, usually allows you to take money out of your account at any time. This means that you can withdraw money whenever you need it, without penalties or losing the interest earned up until that point.
This flexibility makes easy access cash ISAs an appealing option for people who want the security of knowing their money is safe and earning tax-free interest, but also need to be able to access it in case of an emergency. So if you suddenly need your savings for a holiday, unexpected repairs, or any other reason, you can get your hands on your money quickly and easily.
Easy access cash ISAs usually pay a variable rate of interest, which means your returns can move up and down over time, usually in response to movements in the Bank of England base rate.
Top 5 Easy Access ISAs
How do fixed term cash ISAs work?
A fixed term cash ISA, as the name suggests, pays a fixed amount of interest for a set term. There’s a range of different terms available, so before signing up, you’ll need to think carefully about exactly when you’ll want to access your money.
If you are considering tying up your cash for the long term, bear in mind that if interest rates rise during this time, accounts paying better returns might be introduced, and you won’t be able to take advantage of these until your account term ends. Conversely however, if interest rates fall, you may find that the rate you’re earning is considerably higher than if you’d left your savings sitting in a variable rate account.
The following tables show current best buy one and five-year fixed rate cash ISAs currently available:
Top 5 1-Year Fixed Rate ISAs
Top 5 5-Year Fixed Rate ISAs
When you take out a fixed rate cash ISA (or any fixed rate savings account) you normally only have a fixed period of time when you can top it up. Generally, this is up to 30 days or it may be the same length of time as the cash ISA is on sale for. Once that ‘top up window’ closes, you can’t normally pay extra money into your fixed rate cash ISA.
How to choose whether a fixed term or an easy access cash ISA is right for you
When deciding whether a fixed term or an easy access cash ISA is the right option for you, there are various questions to ask yourself which can help you make up your mind.
1) Are you looking for guaranteed returns?
If you want peace of mind that your savings returns won’t change over time, then a fixed term cash ISA may suit you better than an easy access cash ISA, as your returns are fixed for the account term, whereas easy access cash ISA rates are usually variable.
Locking into a fixed rate cash ISA can be useful if you’ve got a specific savings objective in mind and need to know exactly how much interest your savings will earn over time to help you achieve it.
2) When will you need access to your savings?
If you’re saving for a set goal in the future, and you know you won’t need to get your hands on your money before that, a fixed term cash ISA can help remove any temptation you might have to dip into your savings. However, if you want to build up your savings so that you have a cash buffer in place for those unforeseen expenses that can crop up, such as boiler or car repairs, you’ll need your money to be readily accessible. In this instance, an easy access cash ISA may be your best bet.
3) Are you saving towards a specific goal?
When thinking about whether you want to go for either a fixed term or an easy access cash ISA, you’ll need to think about your financial objectives. For example, if you’re saving for home improvements that you plan to carry out next year, the certainty of a fixed term cash ISA could help you meet that target more reliably.
However, if you don’t have a specific goal in mind, and you know you’re going to need to dip into your savings from time to time, you may decide you need the flexibility that an easy access ISA can provide you with.
Transferring your ISAs
If you already have a cash ISA and you’ve decided, for example, that you’d prefer a fixed term rather than an easy access cash ISA, or that you can find better returns elsewhere, you don’t have to leave your money where it is.
- You can transfer the money to another ISA provider and it won’t affect your annual allowance. But be aware that not all ISA providers accept transfers.
- If you’re transferring money in a cash ISA from previous tax years, you can transfer all of it (plus the interest) or just part of it, but if your ISA has money from the current tax year only, you have to transfer the lot.
- Make sure you transfer your cash ISA directly from one ISA provider to another. Whatever you do, don’t cash it in and put the money into an ordinary bank or savings account before it’s moved to your new ISA provider. If you do, your money will lose its tax-free status.
A final thought…
The good news is that it doesn’t have to be a case of only having either an easy access cash ISA or a fixed term cash ISA. You can pay into both types of ISA if you want, provided you don’t exceed your annual £20,000 ISA allowance.
Bear in mind that the amount that can be saved into cash individual savings accounts (ISAs) will fall from £20,000 to £12,000 from April 2027, the Chancellor announced in her November Budget, although over-65s will be exempt from the reduction. Learn more about this in our guide What could Budget changes to cash ISAs mean for you?
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