Variable Rate ISAs

While they come with more restrictions than non-ISA accounts, variable cash ISAs still offer plenty of flexibility. There are generally two types of variable ISA: notice ISAs and easy access.

Variable rate ISAs with a notice period usually require some advance warning before the bank or building society will let you take the funds out of your account, while easy access ISAs generally allow additions and withdrawals without limit, however there are now an increasing number of providers that restrict how many withdrawals can be made in a year.

This is in contrast with fixed rate ISAs, which typically do not allow any access until a certain period has passed, in exchange for higher and set rates. Even if you find the best variable ISA rate, and this can beat fixed rates, there’s always a chance that it can lessen over time – hence the variable part. While this makes it a gamble, the access options these accounts offer could certainly make it worth the risk.

The main benefit of any ISA is that your savings remain tax-free for as long as they are in an ISA. This means you can accumulate quite a savings pot over time, which may well be able to gain enough interest to breach the Personal Savings Allowance.

Specific reasons to pick a variable cash ISA are if you think rates might increase soon and you don’t want to commit your funds to a fixed rate deal, or if you are approaching the time when you will require the funds – such as when you’re closing in on that all-important first home deposit amount.

Most variable rate ISAs will allow you to withdraw your funds – either instantly or following a notice period. Additionally, ISA rules allow you to withdraw and replace funds within the same tax year without this impacting on your ISA allowance (see below). This makes them an excellent choice for people who want to eventually save up a large pot of money but don’t want to lose access.

Per tax year (which runs from 6 April of one year to 5 April of the next year), you are restricted by the ISA allowance as to what you can put away. For both the 2019/20 and 2020/21 tax years, the ISA allowance stands at £20,000.

This means that you can put this amount of money into a new or existing variable rate ISA. If you also want to save in a different kind of ISA (say a stocks & shares ISA), you should note that the allowance covers all of them combined. So, if you want to save in both a cash ISA and stocks & shares ISA, you’ll have to decide whether you want to put an equal £10,000 in each account or divide the funds up differently.

While you’re only able to put a certain amount of new money into an ISA per tax year, you are able to transfer your existing ISA funds across providers without limit. So, if you see a better variable rate elsewhere, you should be able to transfer your whole pot over in one go – just be sure to follow the ISA rules, otherwise you might end up getting in trouble. Bear in mind that not all ISAs allow funds to be transferred in, it depends on the provider.

Related to the ISA allowance are some opening restrictions that might make ISAs slightly less appealing than non-ISA accounts. While you can have as many ISAs as you want, you can only open one new ISA of each type per tax year.

Unless the provider allows the allowance to be shared among its range of ISAs, this means you will have to pick whether you want to open a fixed or variable cash ISA. While opening the new variable ISA saver, you could however choose to also transfer funds into the account from another ISA, so you can accumulate more than just the ISA allowance into your new account within the tax year.

Similarly, there are no restrictions when it comes to how many ISAs you can have open. So, it may take some years, but you could have dozens of separate ISAs eventually – though this will likely make oversight and administration of them quite complicated.

When it comes to cash ISAs, the same depositor protection schemes apply as with other UK savings accounts. That means that £85,000 of your savings are protected per banking institution – unless you’re choosing to save with the Government-backed National Savings & Investments (NS&I), as they can guarantee 100% of your savings remain protected.