Why it could pay to ditch your long-term fixed-rate Isa

Some savers locked into fixed-rate Isas could profit from paying high exit fees to get better returns elsewhere if interest rates rise. The fixed-term deals allow investors to access their money – subject to a penalty fee.

If interest rates rise to a decent level, savers could pay the penalty charge for breaking their fixedterm Isa and earn a better return on their savings elsewhere. Isas are required to allow savers access, even if a fee applies, whereas fixed-rate savings bonds can deny all access for the term.

However, savings rates would need to rise to 2.9pc before investors would profit from breaking a five-year fixed-term deal at any stage in the term.

Some of the fixed Isa exit fees are hefty. For example, Shawbrook’s market leading five-year Isa pays 1.45pc interest a year but charges a penalty fee of 360 days’ interest.

Savings Champion, the independent advice service, has calculated when you should break out of a five-year fixed Isa and take the penalty hit. It is based on £15,240 saved in Shawbrook’s Isa.

After five years the initial investment in the Isa would be worth £16,377.

If investors had been in the five-year deal for just a year, they would need to move their cash to an account paying more than 1.82pc to beat the Shawbrook rate. However, if they broke the fixed deal after four years, they would need to move to an account paying 2.93pc or more.

Those who transfer funds out of the Isa at the wrong time and move to an account paying too little could face very large losses.

Until rates do rise, Susans Hannums from Savings Champion said savers should opt for a balanced savings portfolio.

Savings Champion’s Susan Hannums