The smarter way to save
It's not much fun being a saver at the moment. Spencer Dale, the Bank of England's chief economist, said as much recently when he admitted that slashing interest rates to 0.5% had pushed many households, particularly those of pensioners, into real financial hardship.
"I have the utmost sympathy for the hardship faced by many pensioners and other households dependent on the flow of income from their savings," he said in a speech delivered in London just before Christmas.
"They played no role in fuelling the financial crisis but have been badly hit by the reduction in interest rates that followed.
I understand that the burden of interest rate cuts falls most heavily on savers. And I can understand why, to many, it seems unfair that those with high levels of debt and borrowing should now benefit from lower rates."
Of course, these are fine words from Dale but they provide little comfort to the millions of savers who have seen their income undermined, not just by low interest rates but also by niggling inflation.
The value of £10,000 of savings has fallen to just £9,210 in the past five years, thanks to low interest rates and high inflation. For a basic-rate taxpayer, a savings account now needs to pay 5.25% to beat inflation. For those paying tax at 40%, the figure is 7%.
Savers, understandably, remain angry and frustrated. Indeed, a recent article on Dale's comments attracted nearly 100 comments from readers. Of those that are printable, readers talked about the economy being rescued "at the expense of savers"; and savers being victims of "statesponsored theft on a grand scale".
As Ros Altmann, director general of over fifties financial services company Saga, says: "We have a group in society who have done the right thing [save] and have been treated as sitting ducks."
She adds that savers have been the victims of "silent theft". Is there anything savers can do to mitigate the impact of this horrible economic backdrop on their hard-earned savings? Unfortunately, there is no magic wand I can wave. But let me make two little suggestions to brighten your otherwise grey savings day.
First, ensure you use your annual cash ISA allowance, thereby removing the taxman from the savings equation.
Currently, a maximum of £5,340 can be saved in a cash ISA during the tax year ending 5 April 2012. From 6 April 2012, the annual allowance climbs to £5,640.
My view on cash ISAs is simple. It should be your first port of call for savings. Use it or lose it - that's my motto.
Second, don't allow your savings to wither on the vine, attracting only minimal interest.
Currently, some £200 billion of deposit savings are languishing in accounts paying interest of less than 0.5%, while there are nearly 400 bank and building society accounts paying rates of 0.1% or less.
If your savings fall into these two camps, make it a priority to find
your money a new home paying at least 3% interest. Fixed-rate bonds and online accounts tend to pay the best rates.
In this regard, the launch of Savings Champion (savingschampion.co.uk) is a most welcome development in the savings space. Its website updates the best savings accounts daily and provides information, advice and guides for savers – as well as a wonderful ‘Rate Tracker' service that alerts customers when their own savings rates have changed or when a savings bonus is coming to an end.
Given savings rates change all the time and short-term bonuses are now a common feature of the savings landscape, Rate Tracker is a splendid development. Use it.
Jeff Prestridge is personal finance editor of Financial Mail on Sunday. Email him at firstname.lastname@example.org
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.
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.