Will 2011 be a better year for savers?
Check out the top rates to kickstart your New Year saving habit
Let's not beat around the bush - 2011 is going to be a critical year in more ways than one.
Will the UK economy slide back into recession as the government's spending cuts start to bite? Will unemployment continue to rise? Or will the economy, buoyed by low interest rates, surprise us all by growing beyond our - and forecasters' - wildest predictions? Of course, I hope it is the latter.
The year 2011 is also a critical one for savers - and the savings habit in general. Will 2011 finally see a renaissance in the savings spirit as savers are given a fairer deal from the government and financial institutions? Or will savers continue to suffer as David Cameron and his posse attempt to keep the economy on an even keel?
Of course, I hope it is the former - given that for every mortgage borrower, there are some seven savers. But I wouldn't count on it, given the Bank of England's current loathing of savers and saving in general (it wants everyone to spend, to keep the economy out of recession).
Keep up to date with the best savings rates
The financial crisis has truly dealt deposit savers a cruel hand. One of the prices paid for saving the banks has been a base rate set at 0.5% since April 2009. For those savers reliant on monthly income from their deposits to top up their income (essentially pensioners), this rate has been a disaster.
Most cash savers - even those 'rate tarts' who chase best rates - have had no choice but to stand and watch the real value of their savings pots slowly wither on the vine.
Maintaining the value of those savings for basic and higher-rate taxpayers requires rates of 4% and 5% respectively, but such accounts are few and far between. So this has to be the year when cash savers extract the maximum interest from providers.
A few simple rules will help you along the way
First, use your cash ISA allowance (£5,100 in the tax year ending 5 April 2011) to generate tax-free income.
Read our round-up of the best cash ISA rates
Secondly, ensure you are utilising your personal tax allowances efficiently for savings purposes - especially if one of you is a non-taxpayer and can have savings income paid gross.
Thirdly, be prepared to change accounts if you can get a better deal elsewhere.
Fourthly and finally, spread your money around so that your savings enjoy the financial security of the Financial Services Compensation Scheme. The safety net per institution has increased from £50,000 to £84,000 (equivalent to €100,000). Don't put more than this sum in any one institution or group.
For savers happy to take on more risk, the virtues of equity income unit trusts or investment trusts cannot be overlooked - especially if these funds are held inside a tax-friendly individual savings account.
They can be held either as a complement to a cash ISA, subject to an annual cap of £5,100, or as an alternative, in which case the annual limit is £10,200. Some income-oriented investment trusts have more than 20 years of delivering investors a growing dividend, including the likes of Alliance, City of London and Witan. They should not be ignored.
Two further developments should help the savings habit in 2011. First will be the 'soft' spring launch of the National Employment Savings Trust (Nest) - a pensions vehicle designed to encourage more people, especially the low-paid, to save for retirement. This will be accompanied in 2013 by the auto-enrolment of most workers into works pensions or Nest.
Secondly, autumn will bring in a Junior ISA for children - a replacement for the axed child trust fund.
Let's hope 2011 brings savers a little more joy than the last couple of years. By Jove, they deserve it.
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.
The National Employment Savings Trust
NEST is a government organisation that aims to provide a simple and low-cost pension scheme designed to give its members an easy way of building up retirement savings. You have one NEST retirement pot for life, whether you change jobs, work for more than one employer at the same time, or leave employment. A NEST scheme won’t allow transfers in and out. From 2012, all employees will be obliged to join workplace pension schemes unless they actively opt out and NEST will be the default fund for those employers who do not create comparable alternative arrangements. It will be phased in from 2012 and all employers will be required to contribute 3% by 2017.
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.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.