Hard up?

Children are expensive. However much we love them, there is no doubt they cost us money. So every penny saved is another penny to help with those costs. And one good place to save money is on banking. Not on overdrafts – I explained last month about cutting the cost of those. But on our own money that sits in the bank and often earns virtually nothing at all.

Take the big four High Street banks – HSBC, Barclays, Lloyds TSB, and NatWest. Money in standard current accounts with them earns 0.1% interest. In other words if you keep an average balance over the year of £1000, you get just £1 interest, before deducting at least 20p in tax! It does not have to be like that. The very best current account without restrictions is cahoot. It is an online bank – owned by Abbey National – and pays 3.4% on every pound in your current account – or 3.3% if you want a cheque book. So an average balance of £1000 over the year would earn £34 before tax. Also unrestricted is the Co-operative internet bank Smile paying 3%.

At this point senior executives at Lloyds TSB will be jumping up and down and shouting ‘What about our Classic account? It pays 3.5%!’ But there are two important restrictions on getting that amount. First, you must have at least £2000 a month going into your account. That is far more than the net pay of most people. If there is just one earner it would mean a gross salary of more than £33,000. Second, the 3.5% rate only applies to the first £5000 in your current account. Slightly better is Citibank Direct which pays 3.5% as long as you have an income of £15,000 a year.

Saving on savings
Once you have sorted out your current account, you should look at your savings. Banks are very good at attracting us with good rates of interest and then slowly cutting what they pay, hoping no-one will notice. And often we don’t. Take the Halifax Liquid Gold account, promoted by Arthur Daley in the eighties. It now turns out this account is just what you would expect from TV’s favourite rascal. Despite its name, it now pays just 0.25% on your money. Other terrible accounts include C&G’s Cheltenham Gold paying 0.5%, Lloyds TSB Instant Gold at 0.15% up to £10,000, Woolwich Premier Instant with 0.4%, and Yorkshire Bank’s Cashmaster on 0.1%.

Compare these dire rates to the best. Coventry Building Society pays 4.3%; ING Direct pays the same. Citibank, cahoot and Intelligent Finance all pay 4% or more. If you have £5000 saved up, the difference between the best and the worst can cost you more than £200 a year before tax.

And talking of tax, why give the Chancellor at least a fifth of what your money earns? You can put up to £3000 a year into what is called a Mini Cash ISA. These Individual Savings Accounts are special because no tax is due on the interest earned. Anyone can have one and you can put up to £3000 into it every tax year. You still keep the tax relief even if you take the money out. The only rule is that you cannot put more than £3000 IN to it during the tax year. Husbands and wives can have one ISA each.

The rates on cash ISAs can be better than those paid on regular taxed savings account. You can get 4.35% with Intelligent Finance, 4.16% with Kent Reliance Building Society, and 4.15% with Safeway. All tax free.

Switching
Changing your bank account is easier than ever thanks to a new code of practice. Here is how it works. Choose your account and apply to open it. The new bank contacts your old bank and all your standing orders and direct debits are moved automatically. You tell your employer and anyone else who pays you regular amounts about your new account (some banks will do this for you as well). You can then close your old account.

Special offers
Beware banks that offer new customers a higher rate for a few months. Go for an account that has no special deals for new customers. After all, once you have become an old customer, the deal ends and your money is used to attract these new names.

Rate checks
You can check up on which banks offer the best deals at two places. MoneyFacts is the industry’s standard reference for rates and comparisons. There is also Money Supermarket which sometimes offers its own special deals.

Low paid partner
If you are part of a couple, and one of you does not pay tax consider moving your joint savings into that partner’s name. You can then register to have the interest paid gross without tax being deducted. Ask for form R85 at your bank or building society. If you have wrongly had tax deducted in the past, you can claim it back on another form R40. You can go back to 1998/99. Remember though that moving money means it is legally that partner’s money – not joint money. Only do it if that will not cause problems.

February 2004

e-mail Paul Lewis on paul@paullewis.co.uk