Something for savers to smile about - at last

Published by Jeff Prestridge on 29 April 2014.
Last updated on 30 April 2014

Savings jars

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.

Key component

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.

Pension overhaul

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.

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