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13 Feb 2020

Paragon Bank's new savings features can help get around tricky Isa rules: should you switch?

Find out whether more flexible tax-free savings offer the best rates

Paragon Bank has launched new Isa savings features that will allow savers to open both a fixed-term and instant-access cash Isa in the same year without falling foul of strict Isa rules. Can you benefit?

Paragon's new Isa Wallet is a special type of Isa that is known as a portfolio Isa and could help savers struggling in a tough savings market.

Over the past 12 months, average rates have fallen across instant-access, one-year fixed and longer-term fixed accounts. Long-term fixed rates (18 months and more) fared the worst, falling from an average of 1.62% in March 2019 to just 1.34% in February 2020.

However, the introduction of more flexible, innovative features could signal the first flourishes of 'Isa season', a time when providers start to launch products to entice new savers.

Here, we explain how portfolio Isas work within the Isa rules and allowances, how Paragon Bank's offer compares with the rest of the market and which other providers offer portfolio Isas.

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What is a portfolio Isa?

Normal Isa rules state that you can only pay into one of each type of Isa during one tax year; the only way to save into more than one would involve performing an Isa transfer.

A portfolio Isa - also known as a Isa Wallet - is a feature where savers are able to split their current £20,000 Isa allowance into more than one cash Isa.

For this to work, the cash Isas must all be held by the same provider, and the provider must be signed up for the portfolio Isa feature.

That way, HMRC only counts it as one cash Isa account - regardless of how many cash Isas you open and pay into under the main account umbrella.

What does the Paragon Bank Isa Wallet feature offer?

Under the portfolio feature, savers can open and deposit into Paragon's range of six different types of Isa.

Below, we've taken a look at how these compare to market-leading rates for each type of deal.

Type of Isa accountParagon's rates (AER)Current market-leading rates (AER)
120-day notice Isa1.31%1.31%
One-year fixed rate1.35%1.41%
Two-year fixed rate1.45%1.5%
Three-year fixed rate1.5%1.55%
Five-year fixed rate1.6%1.7%

Source: Paragon and Moneyfacts data.

Paragon's notice Isa offers a market-leading rate and the others are pretty competitive, too.

As an extra bonus, Paragon Bank has also made its instant-access account flexible. This means that when you replace any withdrawals, the money you pay in won't reduce your remaining Isa allowance.

Paragon told Which? that any existing customers who have the instant-access Isa will have any withdrawals made after 10 January 2020 added back to their Isa allowance for the current tax year.

How many portfolio Isa providers are there?

There are currently 12 providers (including Paragon Bank) offering a portfolio Isa. We've outlined the features of each in the table below.

If you're weighing up saving with one of these providers, it's worth considering a few things:

  • Are the interest rates competitive?
  • Can it be opened and managed by a method that suits you?
  • Will you be able to abide by any terms or restrictions placed on the accounts?

Alternatively, you could save into a savings account - an option where there's no limit on how many accounts you can open or save into.

However, any interest earned is not tax-free and therefore counts towards your personal savings allowance.

Basic-rate taxpayers' allowance means they can earn up to £1,000 before paying tax; higher-rate taxpayers have an allowance of £500, but additional-rate taxpayers don't receive an allowance.

Help to Buy Isas are transfer-in only, if at all

The usual Isa rules can be frustrating to those saving into a Help to Buy Isa.

It's a cash Isa, and therefore anyone who pays into one of these accounts is restricted from paying into any other cash Isa accounts in the same tax year.

However, its payment restrictions mean that savers can only pay up to £2,400 (£3,400 in the first year) - a figure that falls very short of the annual £20,000 Isa allowance.

It's in this instance that a portfolio Isa, which covers a Help to Buy Isa and other cash options, can be particularly useful - but, since Help to Buy Isas closed to new customers on 30 November 2019, this utility is only available to anyone who already has an account.

Some portfolio Isa providers, such as Newcastle Building Society, allow you to transfer over existing Help to Buy Isa savings from elsewhere and continue saving for your first home, as well as in other cash Isas.

Lifetime Isa doesn't need to be included

Lifetime Isas aren't included in portfolio offerings, simply because they don't need to be.

Unlike Help to Buy Isas, rules allow savers to pay into a lifetime Isa - be it a cash or stocks and shares account - as well as a 'normal' cash or stocks and shares Isa.