Fix Your Cash ISA And Beat Inflation
How to stay one step ahead of inflation with a fixed rate cash ISA.
With the stock market treading water and many family budgets coming under strain, the need to park any spare funds in a safe haven becomes even more important.
A Timely Reminder
A Cash Individual Savings Account (ISA) is a good place to start. The recent launch by the Skipton Building Society of its market-leading Fixed Rate Cash ISA, serves as a timely reminder that as long as inflation doesn't veer out of control; you can stay ahead of the game and stop the value of your savings from eroding.
Unlike a variable rate cash ISA, the advantage of a fixed rate cash ISA is that the top deals don't include a bonus that will see the rate drop once the introductory period expires. A fixed rate cash ISA literally does what it says on the tin. But, there's little point in purchasing a fixed rate product if you think interest rates are heading higher, and better variable rate products are then likely to become available.
But if you think fixed rate ISAs are the way to go now, let's take a look at what's on offer:
Notice or Term
|Skipton BS||Fixed Rate Cash ISA||6.50%||14.12.09|
|Julian Hodge Bank||1 Year Fixed ISA||6.50%||1 Year Bond|
|Julian Hodge Bank||2 Year Fixed ISA||6.40%||2 Year Bond|
|Julian Hodge Bank||3 Year Fixed ISA||6.40%||3 Year Bond|
|Principality BS||Direct Fixed Rate ISA Issue 36 (2008/2009)||6.40%||05.04.09|
|West Bromwich BS||90 Day Notice Fixed Rate ISA||6.35%||05.04.10|
Skipton's deal compares favourably with Julian Hodge Bank's 1 Year, 2 Year and 3 Year offerings paying 6.50%, 6.40% and 6.40% respectively. Moreover, the Hodge plans require you to stump up an initial deposit of £3,600 (the maximum annual ISA allowance) against the £50 required up-front by the Skipton.
Variable Rate ISAs
In the variable rate cash ISA market meanwhile, table topping Ruffler Bank offers 6.25% AER and has no introductory bonus factored into the initial rate -- unlike the 1% (for 12 months) which forms part of the 6.25% paid by Barclays' Tax Haven ISA. Ruffler also allows transfers in, but does require a £3,600 initial deposit and insists upon 30-days' notice for penalty-free withdrawals.
The bank may not be widely known but it is regulated by the Financial Services Authority and is also a member of the Financial Services Compensation Scheme. Therefore, the first £35,000 of your investment will be fully protected in the unlikely event of it going bust.
When looking at variable rate cash ISAs, the temptation is to plump for the highest available rate. Don't be seduced as the chances are the headline rate is high for a reason, such as the incorporation of the previously mentioned introductory bonus, or the requirement that you put in your full annual allowance of £3,600 initially.
Not So Super ISA?
One product worthy of comment -- if not necessarily of investment -- is Abbey's Super ISA (issue 2), currently paying 9.75% over 13 months. It's unusual because to receive that eye-watering rate, you need to invest an equal or greater amount into a `qualifying' investment product tied to it, such as the bank's stock market-linked Guaranteed Growth Plan.
But a few words of warning: Although the Guaranteed Growth Plan offers full capital protection and allows you to make withdrawals, if you take out money to the point where you have less in your Growth Plan than your Super ISA, Abbey reserves the right to pay the going rate for its Direct ISA -- currently an uninspiring 6% AER (variable) for 13 months.
Before you take out a cash ISA the following points should be considered:
- Does the headline rate incorporate a special bonus that expires after a specified period of time?
- How much money do you have to put in initially?
- Does the plan allow transfers in from other plans/providers? Competitive plans often don't allow you to do so.
- Would you be subject to a financial penalty should you require instant access to your funds?
Finally, ensure that any transfer from one ISA provider to another during the same tax year is seamless enough so that you don't lose your tax-free allowance. Therefore, don't withdraw any money from your existing plan, but simply set up a new one to take the money you want to transfer. Your new provider will be able to help you with all the paperwork.