AN easy tip could give savers top interest rates without having to lock away their cash.
Switching from a fixed-rate savings account to a fixed-rate ISA could help people make the most of their nest egg.
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Fixed-rate savings accounts offer some of the highest interest rates, but this comes at the cost of being unable to withdraw your cash within the agreed term.
So if interest rates increase during your term, you can’t move your money and switch to a better account.
Many believe this is true of fixed-rate ISAs too, but actually, savers are entitled to switch or close their Isa whenever they choose, according to HMRC rules.
This means you could make the most of top rates, without locking your cash away.
Fixed-rate ISAs tend to offer higher interest rates.
For example, Paragon Bank currently pays a top rate of 4.4% interest on its one and two-year fixed-rate ISAs.
Each year, everyone over the age of 16 gets an ISA allowance, which lets them save their cash tax-free.
This means that they can earn interest on their savings in a bank, building society or another financial provider, without paying tax.
The maximum amount you can put away for the 2022/23 tax year is £20,000.
But before you consider switching, it’s worth noting that you will probably have to pay a fee for withdrawing money before the end of the term.
This will most likely result in you losing a set amount of interest you have gained on your cash.
The amount you’ll lose will depend on the length of the fix and the accounts’ terms and conditions.
But it could vary from between 90 and 120 days’ loss of interest.
Sarah Coles, Hargreaves Lansdown’s personal finance expert, said savers should weigh up whether having access to their cash is worth the switch.
She said: “It may make more sense to withdraw where you are fixing for longer, because there’s more risk of rates changing significantly over a longer time period, because so much can change during the fixed period.
“But in return, the penalty tends to be larger – so for moving a three-year fix, you might need to pay 120 days’ loss of interest.”
Sarah added that ultimately, the value of these penalties will depend on how important having easy access to your cash is.
Should I switch to Cash ISA?
Even though cash ISA rates are at the top of their game it’s still important to evaluate if they’re right for you.
Sarah said ISA rates tend to be lower than their equivalent fixed-rate savings account.
So if you’re only planning on saving between £1,000 and £10,000, you’ll be better off with a regular savings account.
This is because the tax saving would only be worthwhile if you were saving a larger sum of money.
Regular saving accounts often generate decent returns, but only on the basis that you pay a set amount each month.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “As has been the case for a few years, consumers should compare both rates, while considering both their Personal Savings Allowance (PSA) and ISA allowance.
“Signing up to newsletters and rate alerts is a great way to keep on top of the latest deals and compare the interest rates offered across all the different products.”
How can I find the best savings rates?
Comparing rates can help you find the best deal, depending on how much you have to save, what access you need to the money, and other factors – as well as the rates.
Websites like MoneyFacts and price comparison websites such as Compare the Market, Go Compare and MoneySupermarket will help you find the best rates available.
These sites let you tailor your searches to an account type that suits you.
There are five main types of savings accounts, and understanding the differences can help you narrow down the options.
- Easy-access savings accounts – usually allow unlimited cash withdrawals. However, this perk means they tend to come with lower interest returns.
- Regular savings accounts – generate decent returns but only on the basis that you pay a set amount each month.
- Notice accounts – offer slightly higher rates than easy-access accounts but you’ll need to give advance notice to your bank (up to 95 days) before you can make a withdrawal or you’ll forfeit the interest.
- Fixed-rate bonds – these offer some of the highest interest rates. However, if interest rates increase during your term you can’t move your money and switch to a better account.
- Individual savings accounts (ISAs) – these can pay high interest but come with high withdrawal fees. But, Lifetime Isas are great for anyone aged 18-39 hoping to buy a house or save for retirement.
It’s worth checking what rate you’re getting regularly and switching if you find a better one, depending on the type of account.
Some come with an exit fee, or you may lose any interest you’ve earned so check the terms and conditions first.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk
