Will fixing your Isa beat the tax-free allowance cut?

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Fixed-rate cash Isa rates have become more competitive in recent months, yet new analysis by Moneyfacts suggests that fewer savers were searching for these accounts in May.

But fixing your Isa now could protect your savings from future rate cuts and help you make the most of the current cash Isa allowance before new rules come in next year.

Here, we take a closer look at what might be behind the decline in popularity and explain how fixing could help you prepare for upcoming changes to tax-free savings.

Why did interest in fixed-rate cash Isas dip?

The main advantage of fixing your cash Isa is that you're protected from any potential rate cuts. That's unlike instant-access products, which have a variable rate that can go up or down at short notice.

However, new data suggests savers are turning away from fixed Isas. Moneyfacts analysis shows that the proportion of customers using its site to find one of these accounts dropped from 26% to 19% between April and May. 

On the other hand, demand for instant-access Isas surged to around 32% – up from 24% in April. 

So what's going on? Rachel Springall, Moneyfacts finance expert, told Which? that market volatility and rumours of a rise in the Bank of England base rate could be why savers were on the fence about locking into a fixed rate last month.

The drop in appetite for fixed cash Isas in May might also be down to the fact that there's generally a surge in demand at the beginning of the new financial year in April.  Providers often launch competitive deals at the start of the tax year to attract savers looking to maximise their annual £20,000 Isa allowance. 

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Can fixing beat next year's savings shake-up? 

From 6 April 2027, major changes will come into force that will impact savers with larger nest eggs. 

Opening a fixed-rate cash Isa could be a good way to side-step the new rules – at least temporarily.  Money already held in a cash Isa will keep its tax-free status, and the new limits will apply to money paid in from April 2027 onwards. 

It means you could, in theory, fix for five years and not have to worry about the changes until the account matures in 2031.

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Where can you find the best cash Isa deal?

Now is also a great time to grab a top fixed Isa deal, with rates climbing to their highest level since 2024. 

Average interest on a one-year fixed cash Isa climbed from 4.17% AER to 4.25% in the month to 1 June. Products lasting more than one year saw average rates increase from 4.14% to 4.22% over the same period.

Instant-access cash Isas saw a slight dip in average rates – from 2.76% on 1 May to 2.74% on 1 June.

This table shows the top cash Isa accounts, ordered by term:

Isa typeProviderAccount nameInterest rate (AER)Provider customer scoreMinimum investmentOpening methodsInterest paid
Instant accessAtom BankEasy Access Cash ISA4.25%76%£0Mobile appMonthly
One-year fixed rateInvestec SaveFixed Rate Cash ISA4.68%n/a£1,000InternetOn maturity
Two-year fixed rateCastle Trust BankFixed Rate e-Cash ISA4.72%n/a£1,000Internet, mobile appOn maturity
Three-year fixed rateCastle Trust BankFixed Rate e-Cash ISA4.68%n/a£1,000Internet, mobile appOn maturity
Four-year fixed rateUnited Trust BankCash ISA 4 Year Bond4%n/a£5,000InternetAnniversary
Five-year fixed rateCastle Trust BankFixed Rate e-Cash ISA4.72%n/a£1,000Internet, mobile appOn maturity

All but one of the top fixed-rate cash Isas currently beat the best instant-access deal.

Castle Trust Bank leads the pack with a two-year fix paying 4.72% AER, comfortably ahead of Atom Bank's market-leading 4.25% instant-access Isa. The only exception is United Trust Bank's four-year fix, which pays 4% AER.

What difference does that make to your returns? Put £20,000 into a two-year fixed-rate Isa paying 4.72%, and you'd earn £1,888 over the term.

Leave the same amount in a 4.25% instant-access Isa, assuming the rate stays unchanged, and you'd make £1,700 in interest –  £188 less than by locking your money away.

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Is fixing right for you?

Whether it's a cash Isa or a savings account, fixing is a great way to guarantee returns. However, it isn't suitable for everyone. Here are the main drawbacks to consider before locking your money away.

No access

Once you’ve put money into a fixed account, most providers won’t let you touch it until the term ends. You usually can’t add to the balance either. Although this helps remove the temptation to dip into savings, it also means you won’t have funds available in an emergency.

Some providers don’t allow early access at all, while others only do so in exceptional circumstances. In some cases, you can close the account or withdraw early in exchange for a loss of interest. Penalties typically range between 90 and 365 days. 

If you’ve only held the account for a year and face a 365-day penalty, your savings won’t have grown at all. It’s important to weigh up whether a new account could make up for this loss before the end of its term.

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Can't switch to a better deal

Although rates are falling now, five to seven years is a long time. Think how much has changed in just the past few years. On 1 February 2021, the average one-year fix paid just 0.46% AER and longer-term bonds 0.68%.

Those who opened long-term fixed accounts before rates skyrocketed are still stuck with low returns and unable to switch to better deals. The same could happen if you tie in now and rates rise again.

Find out more: 

source https://www.which.co.uk/news/article/will-fixing-your-isa-beat-the-tax-free-allowance-cut-ahizD0a8VkFa
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