With the start of the next tax year a recent memory, many of us will be looking to find the best ISA deal to make the most of the new year’s £20,000 allowance.
New rules mean that you can now put money into the same type of ISA with different providers, so you may be wondering what the best strategy is for you, particularly the fixing of interest rates given further drops in inflation may lead to lower returns in future.
Fixing your ISA rate
Fixed-rate ISAs offer the allure of stable returns in a market where interest rates and inflation are subject to change.
With the UK nearing the Bank of England’s (BoE) inflation target of two per cent, savers must consider both the benefits and disadvantages of locking into a fixed ISA product.
Benefits of fixed ISA products
- Guaranteed rate of return: The most significant advantage of a fixed ISA is the security of a guaranteed interest rate over the term of the ISA, which can range from one to five years.
- Simplified savings strategy: Fixed ISAs offer a straightforward, set-it-and-forget-it approach to saving. Once your funds are deposited, you don’t need to manage or monitor fluctuations in the rate.
- Better long-term returns: At the moment, many fixed ISAs provide a lower interest rate than their easy-access or variable counterparts. However, the certainty provided by the fixed rate means that long-term you may enjoy a better, more stable return.
Disadvantages of fixed ISA products
- Lack of flexibility: The major drawback of a fixed ISA is the lack of access to your money during the term without incurring a penalty. This can be a significant disadvantage if you find yourself in need of emergency funds.
- Lower interest rates: Looking at the current market, most fixed-rate ISAs offer a lower rate than their variable counterparts.
- Opportunity costs: Locking into a fixed rate when rates are on the cusp of potentially falling might seem wise, but it also means missing out on potentially higher returns should rates go up instead.
- Inflation risk: While fixed ISAs guard against falling interest rates, they do not protect against inflation, which could erode real returns.
Diversify your savings strategy
Rather than locking all your savings into a fixed ISA, consider spreading your funds across various types of ISAs, savings accounts and other investments.