An ISA (Individual Savings Account) is a tax-efficient way to save or invest money in the UK. When considering returns on an ISA, you’ll typically choose between fixed-rate and variable-rate interest options. Let’s break down how to calculate returns for each. For more information please visit Calculate ISA Interest

Fixed-Rate ISA Returns

A fixed-rate ISA locks in an interest rate for a set period (e.g., 1, 3, or 5 years). Your interest earnings are predictable and do not change with market fluctuations.

Formula for Fixed-Rate ISA Returns

A=P×(1+r)tA = P \times (1 + r)^tA=P×(1+r)t

Where:

  • AAA = Final amount after interest
  • PPP = Initial deposit
  • rrr = Annual interest rate (as a decimal)
  • ttt = Number of years

Example Calculation

  • Deposit: £5,000
  • Fixed Interest Rate: 4% (0.04)
  • Term: 3 years

A=5000×(1+0.04)3A = 5000 \times (1 + 0.04)^3A=5000×(1+0.04)3A=5000×(1.1248)=£5,624A = 5000 \times (1.1248) = £5,624A=5000×(1.1248)=£5,624

After 3 years, you will have £5,624, earning £624 in interest.

Variable-Rate ISA Returns

A variable-rate ISA has an interest rate that can change over time, depending on the market or the provider’s terms. Since rates fluctuate, calculating future returns is uncertain. However, if you assume a changing rate each year, you can estimate potential returns.

Formula for Variable-Rate ISA Returns

For varying rates across years:A=P×(1+r1)×(1+r2)×…×(1+rn)A = P \times (1 + r_1) \times (1 + r_2) \times … \times (1 + r_n)A=P×(1+r1​)×(1+r2​)×…×(1+rn​)

Where r1,r2,…rnr_1, r_2, … r_nr1​,r2​,…rn​ are the different rates for each year.

Example Calculation

  • Deposit: £5,000
  • Year 1 Interest Rate: 2% (0.02)
  • Year 2 Interest Rate: 3% (0.03)
  • Year 3 Interest Rate: 1.5% (0.015)

A=5000×(1.02)×(1.03)×(1.015)A = 5000 \times (1.02) \times (1.03) \times (1.015)A=5000×(1.02)×(1.03)×(1.015)A=5000×1.0665=£5,332.50A = 5000 \times 1.0665 = £5,332.50A=5000×1.0665=£5,332.50

After 3 years, you will have £5,332.50, earning £332.50 in interest (less than the fixed ISA in this case).

Which is Better?

  • Fixed-rate ISAs are better if you want guaranteed returns and protection from rate drops.
  • Variable-rate ISAs are beneficial if rates are expected to rise, offering potentially higher returns.

Would you like a tool to calculate these values dynamically?