Fewer people are saving and those who do are saving less. Figures from the Government’s National Savings & Investments arm make worrying reading. Average monthly savings have fallen from £90 a year ago to £82 now.
This should be no surprise. Savings rates are low and will remain so following last week’s decision by the Bank of England that the base rate are staying at 0.5%. Yet rates charged on personal loans, credit card debts and mortgages are much higher than this, so it makes sense to use spare cash to pay down debt.
Savers deserve sympathy in this low interest environment. Retired people in particular who rely on income on savings to support state and occupational pensions are having a tough time. The good news is that opportunities for tax-free income on savings are improving.
From 6 April, higher limits for tax free savings come in for ISAs – Individual Savings Account. Savers will be able to put £5,100 a year into cash ISAs, plus another £5,100 in equity ISAs. This will give the whole population the same savings opportunities that have been available to the over 50s since October.
Take-up of ISAs is much lower than policy-makers would like. According to a study by the National Savings & Investments, part of the reason is the lack of knowledge and understanding of ISAs: a mere 15% of people know about the new savings limits. And more than a third of those who do know do not intend to take advantage of them because of the low interest rates available.
Better than nothing
Yet ISAs offer much better returns than some other savings products. While many ordinary savings accounts offer a mere 0.1% interest, the average rate on a variable rate cash ISA is 1.28%. Not great, but much better than the worst savings accounts.
Fixed rate ISAs provide some of the best returns, with the highest at 3% – offered by the Post Office, Britannia, Clydesdale Bank, Yorkshire Bank, Newcastle Building Society, Mansfield Building Society and Julian Hodge Bank, according to Moneyfacts.
Despite the low interest rate environment, returns on fixed rate ISAs have increased in recent months as competition hots up for the new ISA season. Darren Cook of Moneyfacts says: “A fixed rate ISA has become the providers’ preferred growth area, with the number of available fixed rate ISA deals doubling from 41 a year ago to 84 today.” But, he warns, before transferring from one ISA provider to another it is important to check that you will not be penalized by your existing bank for doing so.
Another problem, highlighted by many readers, is the often slow and bureaucratic procedures to transfer ISA accounts between providers. Any delays in ISA transfer that are not fully compensated should be followed by complaints to the banks in the first instance and subsequently, if not successful, to the Financial Ombudsman Service.
Cash ISAs can pay more
Unusually, at present the best instant access cash ISA pays slightly more than the best fixed rate ISA. The best cash ISA is offered by Santander at 3.5% (the same product is also offered by its Alliance & Leicester subsidiary): although this has a variable rate, this is guaranteed to stay at least 3% above base rate. Other attractive instant access ISAs include 3% from the Newcastle Building Society and First Direct and Nationwide Building Society at 2.75%.
But there are problems with obtaining the best possible ISA rates. The market leading rate from Santander is only available to existing Santander savers and new customers – not for transfers from other ISA accounts. However, First Direct’s ISA does allow transfers from other accounts.
It is easy to overlook the benefits of fully utilizing an ISA allowance, but is important to do so.
Kevin Mountford, head of banking at Moneysupermarket.com explains: “Consumers that can afford to save should be looking at ISAs, no question. Even though rates are low, the benefits of a tax-efficient wrapper should not be overlooked. Savers who have funds in older ISA accounts should remember that in most cases they are able to transfer these funds to their new ISA without losing the tax free status. With many older ISA accounts now paying a pittance it is important to transfer your funds to make the most of this pot.”
Question of Finance
Q. I want to ensure that my savings are invested safely. In particular, I want to maximize my protection under the Financial Services Compensation Scheme. I believe that if I put money into two banks that are part of the same group of companies they are treated as if they are just one bank. How do I maximise my protection?
A. Banks and other financial services companies regulated by the Financial Services Authority are guaranteed under membership of the FSCS. But that protection is limited to £50,000 per saver, per institution. This is confusing because some banking groups operate under separate brand names and may not obviously part of the same bank. Examples include Alliance & Leicester, which is part of the Santander group. A saver who has £50,000 in Alliance & Leicester and another £50,000 in a Santander (formerly Abbey) account would have protection limited to just £50,000. Other examples of banking brands that are part of larger groups include First Trust Bank, which is part of the AIB Group; Britannia is part of the Co-operative Group; the Cheshire and Derbyshire building societies are now owned by the Nationwide Building Society; and MBNA Savings is owned by the Yorkshire Building Society. Although Ulster Bank is part of the RBS group, it is separately registered with the FSA so has a separate £50,000 protection limit. Similarly, while Halifax, Bank of Scotland, Birmingham Midshires and Intelligent Finance are all now part of Lloyds Group, all are actually registered under Bank of Scotland.