What's Behind the Difference in Rates Between ISAs and Fixed Term Bonds?

There are several factors influencing the difference in rates between ISAs and fixed rate bonds.

The current difference between the two types of cash based investments is 0.44% in favour of fixed rate savings bonds. The fixed rate bond paying the highest rate at the moment for a term of 1 year is Masthaven's product at 1.9%, which compares favourably in terms of rate to Charter Savings Bank & Oaknorth Bank offer 1.46% on their ISA products.

Smaller providers offer the best rates for both types of policies. The cash ISA market is the less crowded of the two, due to the fact that the provider needs to apply for a special licence in order to offer the product, resulting in fewer participants.

As fixed rate bonds are generally more restrictive, they allow the provider to offer better rates due to the certainty given to the provider as a result.  

While some providers do allow withdrawals from fixed ISAs, there are often penalties involved, such as the 365 days loss of interest charged by provider UBL on their 5 year ISA product.

While this may seem punitive, it means that the provider is offering some flexibility on the product, essentially reducing the interest they can afford to pay on the product.

There is also the fact that it's only possible to contribute up to £20,000 per year in to an ISA, while some fixed rate bonds allow subscriptions up to £250,000. Keep in mind however, that the Financial Services Compensation scheme only covers the first £85,000 that is held with each provider.

It's possible to earn 30% more with a fixed rate bond than with an ISA at the moment, however, this situation may not last.

The introduction of the personal savings allowance which allows some people to earn up to £1,000 in interest without having to pay tax on it has reduced the appeal of ISAs.

Additional rate taxpayers do not benefit from this however, so the appeal of ISAs remains for them.

If you have longer term investment goals however, it may be worth looking in to a stocks and shares ISA.

Contact Westminster Wealth Management today and one of our skilled advisers can construct a financial plan for you that will enable you to meet your financial goals.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

Information is based on our current understanding of taxation legislation and regulations which is subject to change.