On the face of it, Issue 20 of the Post Office’s online easy-access Isa looks like a pretty good deal.
It pays 1.25 per cent, the second best tax-free savings rate on offer – 0.1 percentage points lower than the best deal – and can be opened with £100.
It also accepts transfers from another Isa that a saver may already hold, and you can make withdrawals whenever you want.
However, it comes with a rather large catch. After 12 months, the Isa rate loses four-fifths of its value overnight, with the rate paid on savings dropping from 1.25 per cent to just 0.25 per cent.
Diminishing returns: The Post Office’s new online Isa pays 1.25% on balances, but after 12 months this shrinks to just 0.25%. Could bonuses like this become more common?
This means that in practice, if someone had deposited their full annual Isa allowance of £20,000 into the account, after the first year they would earn £250 a year in interest.
A year later, assuming no further contributions or withdrawals, the £20,250 would earn just over a fifth of that; £50.63.
On £50,000 of savings, the difference is even starker. In the first year, a saver would earn £625 in interest.
After the rate fell from 1.25 per cent to 0.25 per cent, in the second year this £50,625 would earn just £126.56 in interest.
Savers concerned about making the most of their money would therefore likely be looking to move their Isa after the first year, or else leave it languishing in an account paying a third of the current Bank of England base rate and less than a fifth the current rate of inflation of 1.3 per cent.
The alternative that is popular with many is simply to find an account with a consistently decent rate, rather than a table-topper that drops after a year.
However, savers may well find themselves in a situation where they are forced to go through this money moving process every single year.
Because under new proposals for reforming the easy-access market, it is possible all easy-access savings deals and cash Isas could soon look like this account.
|Deposit amount||Interest earned after 12 months
|Interest earned after another 12 months
Bonus rates aren’t new – but could become the norm
How This is Money covered the announcement of the FCA’s proposals
In January, the financial regulator the Financial Conduct Authority launched a consultation into the introduction of a ‘basic savings rate’.
All savings providers would have to set one single rate for all their easy-access savings accounts and another one for all their easy-access Isas.
They would be expected to offer limited time only special rates, however, under the plan.
And that means that it looks quite a lot like the Post Office account featured here.
The FCA proposal came after concerns that the vast majority of savings deposits are held in accounts opened more than five years ago.
Banks either offer attractive initial rates, topped up with bonuses which expire after a period of time, and then make repeated rate cuts over time.
Alternatively, some just have lots of savers on legacy accounts that now pay a pittance.
The Post Office, for example, has 44 issues of its online easy-access account, with the first 10 issues paying as little as 0.10 per cent.
Issue 44, by contrast, pays 1.32 per cent, which falls to 0.5 per cent after a year.
While this highlights that bonus rates are nothing new, and will not be banned under the FCA’s proposals, the push to help savers with money stored in old savings accounts could lead to a slight uptick in those rates, at the expense of those savers who do move their money.
What did the FCA say?
Announcing the proposals, the FCA’s director of strategy and competition, Chris Woolard, said they ‘will prevent firms from gradually reducing interest rates over time and make them compete for all their customers.
‘We are concerned that many longstanding customers are seeing a poor outcome and we want firms to focus more on these customers.
‘The new rate will also make it easier for savers to know whether they are getting a good deal after any introductory offer has expired.’
This is because it is unlikely a bank will want to set its easy-access rate high, while the FCA is not setting a minimum floor that banks must pay.
Savings experts have suggested that in the current market banks and building societies could opt for standard rate as low as 0.25 per cent.
The Post Office, for example, could slightly benefit those with savings in issues 1 to 10 of its online easy-access account by setting its single rate at 0.25 per cent, but this would have a knock-on effect on those who signed up to the latest issue of its online Isa.
Those savers who opened the new account would find the rate falling fast after a 12 month bonus period expires.
Andrew Hagger, the founder of personal finance site Moneycomms, said: ‘It’s unlikely that banks will want to pay more overall to attract cash balances and take a hit on their profit margins.
‘Longstanding customers may see a slight improvement in rates, but the cost implication of this move could mean lower rates for new customers.’
Meanwhile savings industry expert James Blower said: ‘Having frowned upon bonus rate savings for so long that most of the sector have stopped using them, bar Cynergy Bank, the Post Office and Tesco Bank, the irony is that the FCA’s proposals may well incentivise others to start using them in a similar way.
‘It will be interesting to see how the new basic savings rate shapes up but my expectation is that it won’t provide the change that the FCA hope for and will create some unintended consequences, potentially including greater use of bonus accounts from providers who have previously avoided them.’
Provided the FCA introduces these rules then, it is possible then that the Post Office’s new online Isa is a sign of things to come.
An enticing temporary bonus, after which the rate plummets, leaving savers with the choice either of constantly hopping from account to account, or once again having their money languishing on a low savings rate.
But at least they’d be getting 0.25 per cent rather than 0.10 per cent.
THIS IS MONEY’S FIVE OF THE BEST SAVINGS DEALS
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