For Britain’s savers, it has been a difficult few years. I read an article recently saying that the household savings ratio is at record lows, which is in part a reflection of the squeeze on wages. However, another problem is the poor savings rates on offer by banks and building societies, meaning interest earned on savings accounts and cash ISAs are abysmal; and have been ever since the financial crisis. This naturally disincentivises people to put money away, and with inflation on the rise, it’s becoming quite difficult for families to build their rainy-day fund.
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However, against this challenging backdrop of gloom, I thought I’d offer four positives, and reasons to be optimistic which you might not otherwise have been aware of…
- The Personal Savings Allowance
Until April 2016, saving returns in the UK are something which is taxable. Well, they still are. However, for those in the basic-rate tax bracket, the first £1,000 of savings income earned in each financial year is now protected under the Personal Savings Allowance. This figure drops to £500 for those who pay higher-rate tax (those who pay tax at the additional rate are not eligible), but this still affords you an ample shield from paying tax, which means more ends up in your pocket. And to top it off, you don’t need to do anything to claim your Personal Savings Allowance – even if you earn more interest than the threshold amount, HM Revenue & Customs simply changes your tax code in order to claim the tax due.
- Competition among banks
For the first time in what feels like ages, there are some indications that the trend of quashed interest rates on savings accounts is being reversed. There have been some deals on limited amounts for a while now, such as the 5 per cent you can earn on a Nationwide FlexDirect account (on up to £2,500), or the 3 per cent offered by TSB on their Classic Plus account (up to £1,500). However, the likes of Al Rayan, Paragon and UBL have all upped their rates to around 2 per cent in a bid to reach the top of the best-buy tables, while even Cash ISAs are beginning to nudge in the right direction. None of these numbers are electrifying, but they at least represent a welcome shift in momentum.
- The Innovative Finance ISA
One alternative to saving is peer-to-peer lending, whereby you lend your money directly to those in need of a loan by virtue of an online platform. The platform vets the borrower for creditworthiness, and then they pay off the loan with interest directly to you. By eliminating a bank from the process, you and the borrower get a better rate, and thanks to the new Innovative Finance ISA, you can shield these returns from tax. The only downside is that your capital is at risk, and are returns not guaranteed if the borrower defaults. However, most leading platforms have excellent track records.
- Signs of life with interest rates
The Bank of England put base rates at a new record low of 0.25 per cent after the vote for Brexit, which piled further misery on long-suffering savers. However, in recent weeks, with inflation beginning to slope upwards, rumours continue to circulate that an increase may not be too far away. While that might not be great news for those with loans and mortgages, it would be good for families looking to save for the future, and ensure their household is in good financial health. Let’s see what happens in the weeks and months to come…