fixed rate ISA - interest question
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If I put a lump sum of 100 in a 4 year fixed rate ISA can I add a further 100 at the start of each year in the term? Also, with a 4% rate, does the interest add up each year? e.g.
End of year 1: 100 + (100 x 0.04) = 104
End of year 2: 104 + 100 + (204 x 0.04) = 212.16
End of year 3: 212.16 + 100 + (312.16 x 0.04) = 324.64
End of year 4: 324.64 + 100 + (424.64 x 0.04) = 441.62
Andy1111
1 year ago
Expert Financial Adviser Answer
Richard Salter
answered 1 year ago
Fixed rate (cash) ISA deposits are exactly that - fixed rates. This means that you cannot add money to the same account as rates and terms change all the time. At the point of deposit you will be told the interest rate, whether it is fixed or not and any term. Next time you come along with cash to deposit each of these items may have changed - the rate, term and type of account so i would expect that you NOT be able to get the same terms a year on.
However after Bank rate has been so low for so long I would expect that interest rates will actually start to rise from here and if this turns out to be true you may well find that you will be offered higher interest rates at future deposit points.
Yes the interest typically cumulates as per your calculations on your account each year. In other words most such accounts do not pay out the interest earned at the end of each year - only the cumulated amount at the very end of the fixed term period.
Bear in mind that capital deposits are protected up to £85,000 held with any single banking group but with inflation now running at 3.4% a basic rate taxpayer will currently need to earn 4.25% gross interest on a taxed deposit account (3.5% if ISA) if they are to maintain the real purchasing power of their cash by the end of a fixed rate period. Wherever possible therefore do keep any cash deposits you hold in Cash ISA accounts - instant access if you need access at short notice and then longer term fixed rates for any extra cash you feel it appropriate to hold.
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However after Bank rate has been so low for so long I would expect that interest rates will actually start to rise from here and if this turns out to be true you may well find that you will be offered higher interest rates at future deposit points.
Yes the interest typically cumulates as per your calculations on your account each year. In other words most such accounts do not pay out the interest earned at the end of each year - only the cumulated amount at the very end of the fixed term period.
Bear in mind that capital deposits are protected up to £85,000 held with any single banking group but with inflation now running at 3.4% a basic rate taxpayer will currently need to earn 4.25% gross interest on a taxed deposit account (3.5% if ISA) if they are to maintain the real purchasing power of their cash by the end of a fixed rate period. Wherever possible therefore do keep any cash deposits you hold in Cash ISA accounts - instant access if you need access at short notice and then longer term fixed rates for any extra cash you feel it appropriate to hold.
ffuster
answered 1 year ago
Dear Richard,
I currently have a 2-year fixed cash ISA with Lloyds TSB which allows me to do exactly what Andy111 is looking for, ie: I can add to the same account each anniversary and actually throughout the fixed term as well. So I transfer to the same account the full allowance again if I can on 6th April...this account can also be managed online.
Lloyds TSB seems to be the only one allowing this however. I was considering moving the account at the end of the term to a 3-year fixed ISA from Halifax but won't in the end, despite a higher % return (4.25 compare to 3.7), because: I cannot add to the same account, the account cannot be managed online and I would end up having to open and manage other ISA accounts each year. So I am renewing with Lloyds for another 2 years.
So why is it then that most banks, except Lloyds, put such restrictions to fixed ISAs? Surely it is not a technical difficulty.
Most, if not all, banks would benefit from allowing their customers to add funds at each anniversary if their rates stayed competitive and the customer would only open a new fixed cash ISA account elsewhere if he found a better rate of return. Customers cannot take the money out until the end of the term anyway (or get penalised).
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I currently have a 2-year fixed cash ISA with Lloyds TSB which allows me to do exactly what Andy111 is looking for, ie: I can add to the same account each anniversary and actually throughout the fixed term as well. So I transfer to the same account the full allowance again if I can on 6th April...this account can also be managed online.
Lloyds TSB seems to be the only one allowing this however. I was considering moving the account at the end of the term to a 3-year fixed ISA from Halifax but won't in the end, despite a higher % return (4.25 compare to 3.7), because: I cannot add to the same account, the account cannot be managed online and I would end up having to open and manage other ISA accounts each year. So I am renewing with Lloyds for another 2 years.
So why is it then that most banks, except Lloyds, put such restrictions to fixed ISAs? Surely it is not a technical difficulty.
Most, if not all, banks would benefit from allowing their customers to add funds at each anniversary if their rates stayed competitive and the customer would only open a new fixed cash ISA account elsewhere if he found a better rate of return. Customers cannot take the money out until the end of the term anyway (or get penalised).