ISAs in 2011 – Fixed or Variable?

How to Choose the Best ISA - Cash or Stocks?

by Rebecca Hall on 30 Mar, 2011

With the new tax year just around the corner, savvy savers are considering their options when it comes to ISAs.

The increase in cash ISA allowance means that now savers can earn even more money tax-free. From the 6th April, you will can put a total of £5,340 into a cash ISA, up from £5,100. But what’s the best option for your money? Fixed or variable?

Fixed Rate ISAs
As it stands, fixed rate ISAs give by far the best rate. They are also incredibly inflexible. This is the trade off you make with a fixed rate; banks reward certainty.

Comparitively speaking rates are still very low, as a result of the staggeringly low Bank of England base rate (holding steady at 0.5% at the time of writing). Even the best 1 year ISAs yield less than 4% interest, barely keeping up with inflation.

For the best return, a fixed rate ISA for 2 years or more will give above inflation rates, so if you can spare your money for that long, that could be the best option.

On the other hand, the base rate has remained the same for 2 years now, and experts are predicting a rise sometime in the summer. These predictions are far from infallible, but with inflation rising, the Bank of England is under pressure to hike the rate. If you tie yourself into a fixed rate now, your ‘high’ interest may not look so good in 2 or more years.

Variable Rate ISAs
Variable rate ISAs tend to be far more flexible than fixed rate. Generally speaking, it’s easier to get your money out (fixed rate ISAs often don’t allow you to withdraw money at all, if they do you sacrifice 180 days interest), if you can’t put in the whole allowance in one go you can top them up, and if the base rate goes up, so will your interest payments.

However, it comes at a cost. Rates offered on variable rate ISAs are far less attractive than fixed rate, and given the below-inflation rates offered on even fixed rate, variable rates are significantly less valuable.

That said, the added flexibility is a big boon and gives you the option of moving your money should something drastic happen with the base rate, and you’re still keeping a significant chunk of capital away from the tax man.

What’s the Best Option?
As ever, it depends how much money you have to save and how willing you are to keep an eye on it. If you’re happy to watch rates like a hawk and move money quickly then a variable rate is probably the best option. But if you’d rather just leave it, happy to be getting a reasonable return, then a medium term fixed rate ISA is probably best.

Of course, there’s always a middle ground – you could split between a fixed rate ISA and variable rate fix (or vice versa), or you could go for a short term (1 year) fixed term ISA and reassess in 12 months.

About the Author

Rebecca Hall

Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.