Savers usually have to lock up their money for at least a year to get the best interest rate, which is currently close to 5 percent.
But there’s a little-known trick to getting the best rates and still accessing your money when you really need it.
Savers who want the convenience of having access to their money should opt for an Individual Savings Account with Fixed Interest (ISA) instead of an ordinary Fixed Interest Savings Account.
That’s because depositors have the right to change or close their Isa whenever they want, under the rules of the HM Revenue & Customs (HMRC).
This right applies even to fixed rate ISAs and should be stated in the terms of the account.
Access: Depositors have the right to change or close their Isa whenever they wish, under HM Revenue & Customs rules – this right even applies to fixed rate Isa’s
Savers will usually have to pay a penalty because they can have their money early. But they do enjoy the reassurance of having access to their money in case of an emergency.
In contrast, non-Isa fixed-income bonds allow you to withdraw your money early under almost any circumstances.
Savings providers make an exception if you are terminally ill, but rarely if you need your money because, for example, you have lost your job or you need money to buy a house.
Fixed rate cash Isa providers do not allow you to withdraw money from your account, but you must allow you to cancel or transfer your savings to another provider if you wish.
You do pay a fee. Paragon Bank, for example, pays a top rate of 4.4 percent interest on its one- and two-year fixed-rate ISAS.
If you decide you need your money back before the end of the fixed rate period, you can close your account or transfer your money elsewhere and you will be charged 90 and 180 days of interest respectively.
Saving £10,000 would equate to a fine of £108 over 90 days or £216 over 180 days.
Halifax pays 4.2 percent on its one-year fixed-rate cash Isa and charges 90 days interest if you close it early.
Likewise, the two-year and five-year versions pay 3.8 and 3.4 percent interest respectively, and come with a 180-day interest penalty and a full year of early closing.
If you think there’s even a slight chance you’ll need to collect sooner, you might prefer an account with a slightly lower fee that has lower penalties for closing.
For example, Virgin Money has one of the lowest penalties for closing a fixed rate Isa early.
It charges two months of interest on its one-year Isa rate (which pays 4.33 percent) and 90 days on its two-year version (which pays 4.4 percent).
Some accounts come with much higher penalties. For example, Santander’s one-year Isa pays 4.15 percent but charges four months’ interest for early closing, while the two-year Isa pays 4.2 percent and charges the same amount of interest for early closing.
There are very few standard fixed rate bonds that allow you to get your money back early. Rachel Springall, financial expert at scrutineers Moneyfacts, says: “It is therefore vital that investors are familiar with their initial investment and the length of a bond term.”
The top payers, including Charter, Close Brothers Savings, United Trust Bank, and Investec, won’t let you withdraw money or even close the account.
These pay more than 4.9 percent on their one-year bonds with Close Brothers’ current top rate at 4.96 percent.
Fixed rate bonds that do allow early withdrawals typically offer lower rates.
For example, the highest one-year bond it does allow is 4.2 percent of Halifax.
But if you close the account early you’ll pay a penalty of 90 days interest – which works out to around £103 for every £10,000 in your account.
Goldman Sachs’ Lloyds, Barclays, NatWest, HSBC and Marcus allow you to close fixed income bonds early with a penalty.
Anna Bowes, of the Savings Champion website, says: ‘On bonds where you can dispose of your money, you have to settle for a much lower interest rate. This may be less than you can earn on easily accessible accounts.”
Lloyds’ two-year bond pays 4.25 percent – with 180 days interest if you leave early. This works out to £209 on every £10,000, effectively reducing your rate to 2.16 per cent in the year you close the account.
With a two-year Flexible Bond from Barclays you can withdraw money – you can make three withdrawals of up to 10 percent of your balance. But the rate offered is only 3.5 percent.
With some Isa lenders, such as Paragon and Virgin, you can withdraw some of your money during the fixed-rate period instead of closing the account completely, but you will be penalized with a loss of interest.
Barclays has one- and two-year, fixed-rate money Isas that allow you to withdraw money three times during the term — but only up to 10 percent of your balance at a time. However, the rates are low at 3.6 percent and 3.7 percent respectively.
sy.morris@dailymail.co.uk
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