Something for savers to smile about - at last
After five tough - some would say horrible - years of low interest rates and a government focused on putting the economy back on track, savers have at last got something to smile about. Indeed, a lot to smile about.
Chancellor of the Exchequer George Osborne is the person savers have to thank. His March Budget for the 'makers, doers and savers' (and bingo players of this country) has put the savings habit firmly back on the map.
Major changes to both tax-friendly individual savings accounts (Isas) and pensions should pave the way for a savings renaissance.
Certainly, leading financial commentators think so. Savings champion Dr Ros Altmann described the Budget as a 'win-win' for savings while Peter Hargreaves, co-founder of Hargreaves Lansdown, said the proposed pension changes were the most 'important' in four decades of working in the financial services industry. There is little to suggest they will be anything but right in their predictions. Saving is back in vogue.
There is no doubt that Isas have become an increasingly key component of the savings landscape, allowing people to accumulate wealth (out of taxable income) and then take the proceeds tax-free. The annual savings allowance is generous at £11,880 – so generous, in fact, that some people over the years have managed to become Isa millionaires.
Yet Isas have long been held back by archaic rules. These include a restriction on the amount that can be invested in cash – no more than half the annual allowance – and a prohibition on transferring equity Isas into cash Isas. It is these silly rules that Osborne has now decided to sweep away.
So from July, when the annual Isa allowance jumps again to £15,000, risk-averse savers will be able to direct their entire allowance into a cash-based Isa. They will also be able to transfer any equity Isas into cash Isas, something many people approaching retirement will find useful as they seek to protect their retirement funds from stockmarket wobbles.
With the junior Isa annual limit also rising from July to £4,000, the Chancellor has given Isas a much-needed makeover.
Welcome as the Isa changes are, they are nowhere near as revolutionary as the overhaul Osborne has earmarked for pensions. From next April, those who have saved over the years into defined contribution (money purchase) pensions will be allowed to choose how – and when – they take income from the pots they have accumulated. In other words, savers will be able to take control of their financial destiny in retirement. About time too.
Although annuities offer the comfort of a guaranteed income for life, rates have plummeted over the past decade, making them a poor choice for many retirees. To make matters worse, many insurers have scandalously railroaded some customers into inappropriate annuities that take no account of key issues such as ill health or the existence of a spouse.
But from next April, the pension game changes. Although annuities will still be the preferred choice for some (16% according to research conducted by accountants PwC), retirees will be able to determine how they 'de-cumulate' their pension pot.
As now, they will be able to take 25% of their fund as tax-free cash from age 55. But thereafter, it's up to them. The only condition is that any withdrawals will be taxed at the retiree's marginal rate of tax.
It's a bold move by Osborne - and one which has already drawn criticism from some who believe people will squander their pensions. But such comments are ill judged. A prudent saver does not become imprudent as soon as they retire.
There was more in the Budget for savers - the abolition of the 10% starting rate for savings, an increase in the amount that can be saved in premium bonds and the promise in the New Year of fixed-rate, market-leading savings bonds from National Savings & Investments for those aged 65 and over.
A Budget for savers. A Budget for common sense. In fact, the best Budget I've reported on in nearly 30 years of personal finance journalism. Get saving again.
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.