New 'holding ISA' could see savers benefitting from the best of both worlds
With all the furore over Pensioner Bonds, the normal flurry of interest in cash ISAs has been a little subdued, not least because rates remain low while the base rate is still rock bottom. However, a growing trend for new ‘holding ISA’ accounts has now spread to the best buy cash ISAs, which could show a light in that long dark tunnel for savers.
The concept of a holding ISA is simple- instead of investing in a single cash ISA account, you invest in a cash ISA ‘wrapper’, and within your cash ISA portfolio, you then choose which cash ISA accounts to invest in, meaning you can choose to invest in both fixed term and instant access accounts.
While allowing easy access to part of your cash is one benefit, a major draw of this new type of account is that savers can "hedge" or protect themselves against rising interest rates. Typically, a fixed-rate ISA will pay a higher rate of interest than an easy-access account, as you exchange flexibility and instant access for a higher rate. Using a holding ISA, investors could put some money into fixed rate accounts and keep another pot in a variable account, ready to move should rates improve within the next three years. The interest would all remain tax-free and within the rule that only one cash ISA can be opened in any tax year as the investment is in the holding account not the individual cash ISA accounts.
But while this is not a new idea- both Newcastle Building Society and Nationwide have introduced similar style accounts, the entry of the Post Office into this market marks a turning point. The Post Office’s fixed-rate ISAs are currently market leading, paying the top rates for two and three years, at 1.95% and 2.1% respectively, and both accept ISA transfers. Even the Post Office easy access ISA at 1.5% is top of the offering, although this does include a 0.85 percentage point bonus for the first 12 months, so after a year savers need to be savvy about looking for a better rate.
The ISA allowance will increase to £15,240 on 6 April for the 2015/16 tax year.
The Post Office said its new Holding Account was created to "address the frustration of customers at being restricted in only being able to open one cash ISA per tax year".
Henk Van Hulle, head of savings and investments at Post Office Money, said: "No customer will now lose out on their annual ISA allowance when choosing a fixed-rate cash ISA over a variable-rate cash ISA. They can benefit from both."
The Post Office’s new online holding ISA will automatically be opened when customers apply for either the Post Office's fixed or easy-access ISA products. We’re still looking for the downside…