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In 2004 the national savings rate in the UK was about 3.4% (i.e. we saved 3.4% of our total incomes). Today it is more like 6%. It seems that Britain’s young and young-ish are finally beginning to realize that they can’t live on debt forever, that they must manage their own pension arrangements (given that neither their employers nor the government appear to be planning to do it for them) and that buying houses doesn’t necessarily count as saving.
The Sunday Telegraph points to an encouraging survey from Standard Life showing that “there has been a sharp fall in the number of people planning to use property as a saving vehicle” and a corresponding rise in the number planning to put money into cash savings or deposit accounts. I count all this as good news but it does come with a sting in the tail: most new savers are losing money in real terms every day.
Don’t pay too much tax on your savings
At the moment with the base rate at 5.25%, a higher rate taxpayer has to be making 7.33% on their savings just to be able to buy the same amount of goods with the same amount of cash at the end of the year as at the beginning (after taking tax and inflation into account). A basic rate taxpayer has to make 5.5%. Yet practically no savings accounts pay much more than 5%.
This means that if you are planning to save more without actually ending up poorer at the end of the year than at the beginning you have to think about how to do it rather more carefully than you would expect. The key here is tax: if you aren’t paying it you should have no trouble making a real return. This means that, assuming you aren’t using your whole allowance up in the equity market, you need a cash ISA. You can currently save up to £3000 tax free in one of these and if you choose the right account you should be able to make a return of 6% or so on the money.
Avoid the banks’ usual tricks
But before you sign up for a deal don’t forget to read the small print: the banks are vying with each other to offer the most attractive looking accounts at the moment but look at the detail and you will soon see that they are up to their usual tricks.
A “prime example” says Emma Simon in the Sunday Telegraph is the Abbey Super ISA. This offers “an eyebrow raising rate of 8%” but comes with a catch: if you want to get it you have to put the same amount of money into the companies Guaranteed Growth Plan – a pretty uncompetitive guaranteed equity bond (GEB). Click here for more on these.
This isn’t worth doing. The difference between the 6% annual interest you can get elsewhere and the 8% on offer here on £3000 is £60: that’s not enough of a bribe to make you buy a substandard investment product, or it certainly shouldn’t be anyway. Watch out too for banks that offer good rates but only if you transfer your current account to them and for those that make up the rate with a ‘bonus’ which they then drop the following year.
ING Direct offers cash ISA account paying 6.55% for example but this includes a bonus that drops out after 6 months taking the payable interest down to a more pedestrian 5.13%. So where should your ISA money go? Options currently include the Portman Building Society, which is paying 6.05%, and National Savings and Investments which is offering returns of 5.8%.
Other UK savings accounts to consider
Once you’ve put all you can in an ISA, what next? Beyond ordinary savings accounts one option to consider might be the National Savings and Investments Index Linked Savings Certificates. These pay 1.15% more than the rise in the Retail Price Index every year. The rate might sound miserly and you do have to tie your money up for 3-5 years, but on the plus side the returns are tax free so you will at least know that when you get your money back it will have held its value.
Finally, note that if you are of pensionable age you are in luck. You, with a little bit of help from the government, are able to make a return of over 10% on your savings. How? By delaying taking your state pension. For every five weeks you delay your weekly pension payout will go up 1%, a deal that equates to an annual interest rate of 10.4%.
Better still, if you defer for 12 months or more, you can choose to take the amount you have forgone as a lump sum. This is taxed as income in the years you receive it, but if you are not already a higher-rate taxpayer, none of it can be taxed at the higher rate. Doing this makes real sense: the lump sum comes with interest set at 2% above the base rate, so 7.25% today. That’s a significantly better risk-free return than you are going to get anywhere else in the market.
All this can add up to real money. Someone entitled to the full state pension and State Second Pension of £105 a week would get £11,743 if they deferred for two years and £32,880 if they did so for five years (assuming interest rates stay the same). The downside to deferring is obvious – if you die before you claim, you won’t get a penny.