e-mail Paul Lewis on paul@paullewis.co.uk
Savers will have to put up with low interest rates for a long while yet, the new Governor of the Bank of England Mark Carney has warned. In the past the Bank has made announcements from month to month. But now it is issuing what Carney calls ‘forward guidance’. As Merryn points out below, what he actually said and what he seemed to want us to believe are two slightly different things. But it is likely that the Bank Rate will remain stuck at its current historic low of 0.5% until 2015 at least and if economic growth is lower than hoped it could last until 2016 or later.
The prospect of low interest rates for even another two years – on top of more than four years already – is bleak news indeed for those who rely on income from savings. And even when Bank Rate does rise there is no guarantee that banks and building societies will pass a rise in bank rate on and raise the interest they pay to savers. It will depend how much they need our money. At the moment they don’t – they can borrow at less than 1% from the Government’s Funding for Lending scheme so why would they rush to pay us more? Since Funding for Lending began in July 2012 interest rates paid on savings have halved and there seems no sign of any revival. The scheme is due to end in January 2015 – but may be extended further.
So with inflation around 3% and the top interest paid on savings barely 2% there are thin times ahead for savers. The income on their money will be stuck in the doldrums and the value of their capital will be eroded by inflation year by year – at 3% its value halves every 23 years.
Cash
If you
have savings your job is to squeeze very drop of income out of them. Rule 1 is
‘show no loyalty’. You must keep your eye on your money and move it at least
every year to make sure you are getting the very best deal. Some accounts tempt
you in with a good rate but after 12 months or so the rate plummets. So you have
to keep your eye on it and move it when that is due to happen.
Check that you have as much as possible in a tax-free cash ISA. Even if you don’t pay tax the rates on instant access cash ISAs are higher than those paid on regular savings accounts, around 0.5% more at the moment. So make sure that you put what you can in a cash ISA. The annual limit per person is currently £5,760 and that will rise in April. You should be aiming for around 2% on a variable rate ISA. Remember this rate can change – National Savings & Investments recently cut its ISA from a table-topping 2.25% to a humdrum 1.75%.
Fixed term ISAs should pay slightly better rates with the best rates for the longest five year fixes. But at the moment the rates are not that much more than instant access – just over 2% for fixing for up to four years. Any fix is a gamble against future interest rates and we know the bank expects to raise rates in three years. But at least you know the rate is fixed and how long it will be paid.
If you already have money in an ISA then check how it is doing and, if there is no penalty, move it to the best ISA you can find. To move an ISA you must open the new ISA and then get the provider to move the money, otherwise the money will lose its ISA status. Some ISAs do not accept transfers so check that first.
Savings accounts
Once you have the maximum in a cash ISA further savings should be put in the
best paying cash account you can find. On instant access you should be getting
at least 1.5% and may get more with an initial bonus. But beware the tricks of
the better paying accounts. If you take money out you may find the rate paid
plunges. As with ISAs, you can get a higher rate by tying the money up for a
year or more. But it is probably unwise to tie it up for too long – 2.9% over 5
years is a good rate now but it may seem terrible by 2017 or 2018.
The first £85,000 in any one financial institution is protected if the bank or building society goes bust. So if you have more than £85,000 you need to spread it across more than one firm – and make sure the firms have separate banking licences. This limit is per person so is double for a joint account. Alternatively you could put your money in National Savings & Investments. The rates are poor – only 1.1% on its instant access direct saver – but the money is 100% safe and you can put in up to £2 million. If you want income then the NS&I Income Bond pays 1.25% on up to £1 million. The money is paid gross monthly so if you are a taxpayer you will have to pay the tax on it. It is a sobering thought that even a million pounds will earn just £10,000 a year after basic rate tax.
Best buys
You
can check on cash interest rates on several websites. I use the best buy tables
from www.savingschampion.co.uk
which does not promote products on the basis of commission or commercial deals
and has a genuinely helpful free helpline answered by experts – if you have more
than £100,000 it will even manage it for you to get the best rates for a small
fee. Other sites are www.moneyfacts.co.uk
and www.moneysupermarket.com. But
both promote firms they have financial arrangements with which makes it harder
to find the genuine best buys.
Investing
With interest rates on savings so low it is understandable that people are
tempted to invest their money. Returns can be higher but investments of any sort
come with the risk that your capital may be less when you need to take it out.
If you are prepared to take that risk then the safest way to dip your toe into
investment is to buy units in a fund that tracks the main shares index – the
FTSE all share or, of you prefer, the biggest firms listed in the FTSE 100. Your
money will grow as the value of shares in the firms in that index grows but
there will be charges. If the optimists are right the economy looks set for a
period of growth. Alternatively if you need an income you could pick a fund
which invests in shares that pay high dividends – see Merryn’s comments below.
But remember that that all investments can – and indeed do – go down as well as
up. If you are retired there is less time and opportunity to repair any errors
you make.
Beware any funds that seem to offer you the gains of a share investment – perhaps following one of the FTSE indexes – but without the falls. They are called structured products. They are not risk free and many people have invested in them and lost money. Avoid anything which is exotic, unusual, or unregulated. And never buy anything from someone who calls you on the phone or sends you an unsolicited email. That way disaster lies.
e-mail Paul Lewis on paul@paullewis.co.uk