The prudent should be rewarded - not punished
What is the point of saving?
It’s a question I am increasingly being asked by an army of readers at The Mail on Sunday, and I’m not sure I have a convincing answer to give them.
There is no doubt that cash savers - young and the elderly - have paid a heavy (unfair) price for the folly of the banks and their reckless lending in the 2000s. Interest rates have been slashed, inflation remains untamed and both banks and building societies have prioritised the rebuilding of their depleted capital bases over giving savers a fair deal.
Although headline interest rates of 3% gross look half decent - you can get more if you are prepared to lock into a fixed rate - many of these deals are riddled with bonuses that are withdrawn as quickly as they are given.
Most savers are now earning no more than 0.1% interest per year on their hard-earned money. To make matters worse, the government has rubbed salt into savers’ wounds by withdrawing its popular inflation-linked savings products.
It is no wonder, then, that Sir Mervyn King, Governor of the Bank of England, says he has “great sympathy” for pensioners struggling with low interest rates and rising living costs.
Things are not going to get better either, in the short term at least. Recent research conducted on behalf of Saga, an organisation that waves the flag for the over-50s, concludes that annual pensioner household incomes will be £1,318 lower in April 2014 than they were in April 2009 as a result of low interest rates and the government’s policy of printing money to revitalise the economy (quantitative easing).
As Dr Ros Altmann, director general of Saga, says: “The current generation of pensioners, especially those newly retired, have often saved diligently for their retirement but are finding that the cards have been stacked against them just as they need to draw their income.
"This is likely to provide a major disincentive to younger generations who will see pensions and savings disappointing those who sacrificed current consumption to provide for their own future.”
So what can savers do?
So, against this backdrop of record-low interest rates, can anything be done for savers?
Some people are now calling for tax on cash savings – a minimum 20% – to be removed. They argue, rather convincingly, that a savings tax is a form of double taxation and so penalises prudence. But at a time of great austerity, it’s something George Osborne, Chancellor of the Exchequer, could not seriously entertain.
Others believe banks and building societies should be doing more for savers. The Daily Mail has launched a campaign to this end, calling on the savings industry to give people deposit accounts that are “simple and encourage people to keep putting away money for the long term”. It also wants pensions and investments “where charges do not wipe out any profits”.
I believe the government could go some way to alleviating the current pain for cash savers by simplifying the rules on tax-friendly ISAs. It is utter madness that only half of the annual £11,280 ISA allowance can be put in a bank or building society deposit account where interest accumulates free of tax.
It means that for the full allowance to be used, someone must be prepared to invest in the markets – something most elderly people do not want to do and many younger people are uncomfortable doing (especially if saving for a home deposit).
I believe if the government allowed cash savers to use the full annual ISA allowance, it would send out a message that it cares about the prudent, the elderly and the young who want to save for the future - the backbone of this wonderful country.
I’ve set up an e-petition calling on the government to do exactly this. If 100,000 people sign it, the issue could get debated in the House of Commons, just in time for the Chancellor’s Autumn Statement, where any positive announcement on ISAs could be made. It’s time for savers to get a fairer deal.
Moneywise is fully backing Jeff's petition. To sign it go to http://epetitions.direct.gov.uk/petitions/38599
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
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.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
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.