The government’s intervention in the midst of the crisis seemed focused on borrowers and businesses to boost the economy at the sacrifice of savers. With quantitative easing and the funding for lending scheme, it has been an extraordinarily tough time for savers, having a negative impact only made worse with inflation running far higher than most savings accounts and well above its target rate of 2 per cent for many years now – until very recently anyway.
The consumer price index, the current official measure, finally fell below the government target of 2 per cent in January and now stands at 1.9 per cent, which in theory should give savers some hope as more accounts will make a real return (after taking account of inflation and tax). At the time of writing there are over 60 cash Isas which currently offer a return that beats or at least matches inflation. Having said this, many of these are longer-term fixed rate Isas which means locking the money in over the term, or they are for locals or existing savers, or have a larger minimum balance requirement in order to earn the highest rates. So not without restriction.
We say in theory that savers should be happy with lower inflation as this is a bit of a double-edged sword. Although more accounts now make a real return, with inflation seemingly under control, this gives the BoE even less of a reason to increase the bank rate any time soon, not that we really expected anything this year.
But there is no sign of an end to the plight of savers anytime soon. In the recent inflation report, the governor of the BoE, Mark Carney, made it clear that there is unlikely to be a rise in interest rates this year and even when the base rate does start to rise, it is likely to remain low, certainly well below ‘pre-crisis’ levels.
And just to cement that we should not expect a rise this year, monetary policy committee member Ian McCafferty also stated that market expectations that the BoE will start to raise rates in the second quarter of 2015 are “not unreasonable”. So all indications point to spring next year. That said, in his inflation report speech, Mr Carney explained that they will look to several measures including unemployment rates to assess if the economy can withstand an interest rate rise, before it makes the decision. So in truth, we do not know when a rate rise will actually happen; only time will tell. No matter how much guess work the markets put into this, there are still a lot of hurdles to jump over.
However, the low base rate and higher inflation is not the only thing savers have had to endure. Added to this is the lack of competition which was a consequence following the launch of the government’s funding for lending scheme. This gave banks and building societies access to cheap funding, negating the need to pull in savers’ money to fund their borrowing books.
With the outlook seemingly so bleak, we often hear savers asking whether it is worth keeping money in cash. The truth however is that everyone should keep some money in savings, for emergencies and expected expenditure, as a minimum. Any taxpayer looking to put some money aside should consider a cash Isa as a starting point for any cash/readily available cash needs, especially if they have not planned to use their Isa allowance elsewhere. But is using the cash Isa worthwhile, especially when there are current accounts which are offering rates that pay better interest, even after basic rate tax or even 40 per cent tax has been deducted?
The problem is that if savers do not use their Isa allowance within each tax year, they lose that year’s allowance forever. And while this may not seem to be a great loss right now, it would mean a reduced lump sum available to earn tax-free interest in the future.
Individuals who have always used their cash Isa allowance could have built up a lump sum of over £65,000 or more and if they had used their Tessa allowance (the predecessor to cash Isas) before this, they could now have almost £90,000 in a tax-free savings account. Even with rates as low as they are, this could mean an extra £500 in interest a year (£1,575 a year rather than £1,080 a year). Better in your client’s pocket than in the taxman’s?
And when rates do eventually rise – surely it must happen one day – and they become competitive once again, this would become even more valuable.
What is essential right now is that savers keep an eye on their savings accounts, including their cash Isas and switch if they are not earning a competitive rate. But it can be tricky to spot the best rates for each savers’ individual needs.
This year, while many of the very best Isa rates are offered by building societies, there are many barriers that will not allow most savers to gain access. An increasing number of Isas have become restricted to existing or local members as the building societies take centre stage, offering some of the best rates available.
It is probably no surprise as many of the banks, certainly the well-known providers, have taken a back seat pulling and reducing many of the leading Isa rates. With over a year of rate slashing, building societies have found themselves exposed in the best buy tables with leading rates that previously would not have stood out. One way to stem the flow of applications is to limit the accounts to local or existing customers and of course look to do what building societies aim to do; support their community and customers first.
If savers have not already used their Isa allowance for the current tax year, the key message is simple: do not leave it too late.
And while Isas are at the top of most advisers’ priority list, why not encourage clients to open next year’s as early as possible. The sooner they start earning tax-free interest the better.
Anna Bowes is a director of SavingsChampion.co.uk
