In his bid to “save the world”, as he let slip recently, Gordon Brown (assisted by the Bank of England) has been happily sacrificing savers to bail out borrowers. Inflation may be falling, but the retail price index is still up 3.9% on last year, meaning a higher-rate taxpayer needs to earn 6.5% (3.9/0.6) just to stand still. This week, Conservative leader David Cameron pledged £4bn of tax cuts, including the abolition of income tax on savings income for basic-rate taxpayers, while Brown simply promised to do “more to help savers” in the next budget. But what should you do now as base-rate cuts clobber savings rates?
Well, before doing anything else, you should pay off any store-card balances run up during the festive season and then cut up these horribly high-interest cards. Next, clear any credit-card or personal-loan debt – see the box below for more on one way to go about this. Then make sure that you have a “rainy day” fund of a minimum of three months’ salary set aside in an instant access account. For those worried about deposit security, the government’s actions over Iceland made it clear that it has no desire to allow British savers to lose their money. But you can’t guarantee that will always be the case, so we’d avoid putting more than the £50,000 covered by the Financial Services Compensation Scheme (FSCS) into any one account.
Anglo Irish bank offers the best rate of 4.55%, according to Moneyfacts.co.uk; but the bank has already had to be refinanced by the Irish government, and the compensation claims process should an Irish bank run into trouble is a little more complicated than the FSCS, as deposits are protected by both the Irish and UK schemes. The current number two for rates is Scarborough building society on 4%. But in any case, neither will allow a higher-rate taxpayer to beat current levels of inflation. A better bet, assuming you still have your cash individual savings account (Isa) allowance available (this has risen to £3,600 a year), would be to open an Isa with either Birmingham Midshires or Manchester Building Society, which are both currently offering 4% tax-free.
Say you’ve got your emergency fund and you’ve used up your cash Isa allowance – what about the rest of your savings? Some commentators tip fixed-rate term deposits. Since base rates are likely to fall further in the short term, the top one-year bonds, such as Indian bank ICICI’s, which pay 5.1%, are a decent deal provided your total cash investment doesn’t exceed the £50,000 compensation limit (ICICI is covered by the UK’s FSCS). If the Iceland experience has made you wary of foreign-owned banks, you could look at the one-year fix at 4.25% from Newcastle Building Society.
But the best bet for higher-rate taxpayers is, if you’ve got one, to pay down your mortgage. That’s because even if you are lucky enough to pay a tracker rate that’s fallen to, say, 3%, mortgage interest is paid out of your after-tax income. So a higher-rate payer is effectively saving 5% (3%/0.6) for every £1 overpaid. Few savings accounts can beat that, and you don’t have any worries about the solvency or otherwise of your provider. Not overpaying your mortgage only makes sense if you can’t because the terms of your mortgage contract don’t permit it, or you pay a spectacularly low interest rate.