Posted on March 13th, 2014 | Categories - Savings
Mark Carney, the Governor of the Bank of England, has predicted that interest rates could rise to 3%, a six fold increase on current levels, by 2017.
After five years of low interest rates, savers would of course welcome such an increase. But the uncertainty over the timing of any rate rise, makes planning tough for savers, especially those making end of tax-year Cash ISA (Individual Savings Account) contributions.
How long should savings be tied up for?
Savers know that the longer they tie up their cash, the better the interest rate they will get. But doing so could leave you high and dry if interest rates rise and your savings are stuck in an account which you can’t access.
The current best buy fixed rate bonds are as follows:
|Fixed rate term||Bank or building society||Gross interest rate|
|One year||Punjab National Bank||2.15%|
|Three years||Punjab National Bank||2.40%|
|Four years||Coventry Building Society||2.75%|
|Five years||Skipton Building Society||3.00%|
Savers need to decide on the optimum period of time to tie up their cash, to maximise the interest received, whilst being able to take advantage of any rate rises which might occur in the future.
When making this difficult decision, savers need to remember to two additional important factors:
- When the Bank of England start to push rates up, they are likely to do so slowly, for fear of damaging the economic recovery; savers shouldn’t expect sudden 3% increase in interest rates
- Whilst it could be years before the Bank push up interest rates, the withdrawal of the Funding for Lending scheme for mortgage lenders, could help to push up savings rates sooner than the Bank will do
Clearly everyone’s circumstances are different, but we would suggest savers think long and hard before they tie up their cash for longer than three years and consider splitting their cash between accounts with different maturity dates, rather than putting all their ‘eggs in one basket’.
We don’t believe the additional interest you receive on a five year fixed rate bond, compared to three years, is worth the lack of flexibility, just when interest rates could be on the rise.
Someone once said that it’s hard to turn a nervous saver into a successful investor. But, if you’ve had enough of low interest rates and inflation eating into your cash, what alternatives do you have?
Cash ISAs Obviously still a method of saving, but by paying the maximum amount possible into a Cash ISA each year, you will effectively improve upon your return by reducing the tax you pay. Remember too, that from July this year, the maximum contribution to an ISA will rise to £15,000 per year.
Whilst popular, many people still overlook their Cash ISA allowance each year, doing so simply means you pay more tax than you need to.
To put it simply, use it each year or lose it!
Deposit based Structured Products Quite possibly the most ‘marmite’ of all investment options; Structured Products are loved and loathed in equal measure.
Sometimes complex, this type of investment, which is covered by the Financial Services Compensation Scheme (FSCS) can provide you with exposure to the returns of equities, but with the guarantee that your capital is 100% secure at the end of the term, or if the product provider goes bust.
Of course there are risks; you will need to tie up your money for between three and six years, if you surrender the plan early you could make a loss and if stock-markets fall you will only get your capital back, the value of which will have been eroded by inflation.
Investing You could decide to invest some of your capital into a portfolio of funds, which matches your attitude to risk.
If you decide to invest, rather than save, you need to be able to cope emotionally with the inevitable rises and falls in value and you need to remember that investing is for the long term, ideally at least five years.
Pension If you are saving for retirement and plan to take an income from your savings, why not consider making a pension contribution instead, or as well as, your savings? If you use a SIPP (Self-Invested Personal Pension) you can still use deposit accounts but you will pay not tax on the interest received.
You will also get an immediate uplift in value of 20% due to the tax-relief you will collect; higher rate taxpayers will be able to claim an additional 20%. Of course you will be tying up your money, without access, until you retire. You will then be able to access up to 25% of the fund as a tax-free lump sum, with increased flexibility as to how you draw down the balance; assuming of course new Government proposals get the go ahead.
We are here to help
They are experienced in advising people on their cash options, if you would like advice call one of our IFAs today on 0115 933 84330115 933 8433, alternatively enquire online or email firstname.lastname@example.org