2023 was a cracking year for savers – especially those who were proactive. So, as we move forward into a new year, it’s a good time to have a good old review and make sure we are doing all we can to make 2024 every bit as successful for our finances. Here are some top tips.
1. Don’t ignore the damaging effect of inflation
40th US President Ronald Reagan famously once said, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”. While this is a very extreme comment, the cost of living crisis hit hard last year.
The good news is that inflation seems to be under control and heading down towards its 2% target. In the meantime, whilst the Bank of England has paused its base rate hikes, 15 rate rises over the last two years means that there are now plenty of savings accounts available that are paying more than the current inflation rate of 3.9% as measured by the Consumer Prices Index (CPI). But there are also plenty out there that are paying far less. And there is still some ÂŁ256 billion sitting in accounts earning no interest at all!
As our easy to use Inflation Calculator illustrates, inflation can erode the real value of our money without us really realising it. So, it’s important to make sure you have chosen the best rates.
If you have £10,000 sitting in an account earning nothing, even though inflation has fallen to 3.90%, after five years, assuming inflation were to remain at its current level, the spending power of that money would have reduced to £8,259. However, if you were to put that cash in the top paying easy access account with Metro Bank and the rate remained at 5.22% for the next five years, the balance including accrued interest, would have grown to £12,897 – and even the real value after the effect of inflation would have increased too – to £10,652.
Try our calculator here
2. Make sure you don’t forget your ISA allowance
As interest rates have risen, cash ISAs have become really valuable once again as savers are fully utilising their Personal Savings Allowance (PSA) with lower and lower deposits – which means more people are paying tax on their savings interest. In April 2016, when the PSA was introduced, the top 1-year bond was paying 1.91% gross/AER so the basic rate taxpayer’s £1,000 PSA would have been used up with a deposit of £52,356. Today however, with the top 1-year bond paying 5.30%, the basic rate PSA would be breached with a deposit of just £18,868. For higher rate taxpayers, just half these amounts will breach their PSA which is £500.
The good news is that although top ISA rates are still lower than the non-cash-ISA equivalent best buys, the gap has narrowed and the tax-free rates of the top ISAs pay more than the net rate of the taxable accounts.
At the time of writing the top 1-year bond is paying 5.30% - which is 4.24% after the deduction of basic rate tax – while the top 1-year ISA is 5.01% tax free. So someone paying tax on their savings would be better off choosing the ISA.
And of course, if you miss the end of tax year deadline, you lose the allowance for that tax year – currently £20,000. So if an ISA is the best option, don’t leave it to the very last minute.
Take a look at our Fixed Rate ISA and Easy Access ISA Best Buy tables.
3. Review, ditch and switch
While over the last couple of years it’s fair to say that the majority of savings accounts have seen some sort of rate improvement, by no means all have and the amount of base rate increases that savers have benefitted from varies wildly from provider to provider and account to account.
For example, the best rate on offer at the beginning of December 2021, before the base rate started to increase, was the Aldermore Double Access Saver Issue 1 and at that time it was paying 0.75%. Today that account is paying its customers a very healthy 4.90% AER. On the other hand, the Santander Everyday Saver which was paying 0.01% is today paying just 1.20% AER (although it is no longer on sale).
And worst still, Virgin Money has some accounts that are still paying 0.25% AER – they have not seen an increase AT ALL over the last couple of years. If you have £50,000 in one of these Virgin accounts, you could improve your pre-tax interest by £2,485 by switching to the top easy access account paying 5.22% AER
So, you can’t be sure your provider is offering you good value. Now’s the time to review your existing savings accounts and see if you can do better.
Take a look at our Best Buy tables for the best deals available.
4. To fix or not to fix?
Top fixed term bond and ISA rates have started falling recently, due to market expectations that there will be at least a couple of base rate cuts over the course of 2024. While not so long ago you could still find several five-year bonds paying 5%, now the top rate is 4.55%. And the top 1-year bond has dropped from 5.80% to 5.30%.
That said, it looks as though we have seen the peak of the savings market and top rates are still far higher than they were.
Two years ago, the top 1-year rate available was paying 1.36% and a year ago things had increased a great deal with the top rate with SmartSave in January 2023 paying 4.26% - today you can fix for 12 months with a rate of 5.30%. And if you have a 2-year bond maturing about now, you would be able to roll over with a rate of 5.15% for another two years, up from the top rate available in January 2022 which was 1.57%.
If you are looking to hedge against any future base rate cuts, you’ll need to move fast if you want to grab these rates as they could well fall further. And although longer term rates are lower than shorter term rates, this is a clear indication that the markets are expecting base rate cuts and therefore more cuts to the best savings rates. So it might be a good idea to tie at least some of your cash up for the longer term. If savings rates and inflation continue to drop, you could find yourself in the enviable position of not only earning more in the long run, but you could also beat inflation for most, if not all of the term of the bond.
Of course it’s important to remember that there is generally no access at all to the capital deposited into fixed term bonds before maturity and there are hefty penalties on early access to fixed rate cash ISAs. So make sure you don’t tie up any money that you might need access to – and perhaps don’t put all your eggs in one basket.
Take a look at the best fixed rate bonds currently available - and also the best Sharia fixed term rates.
5. Are you saving enough?
As most of us are saving in order to make sure we are comfortable in our old age; whether young or older, it’s always sensible to make sure you’re on track. Most of us know we need to put as much as we can aside for our future but rarely know how much we need to save for the retirement we want.
TPO has an excellent calculator that lets you enter all your savings, investments and pension contributions, along with asking when you’d ideally like to retire to give you a clear picture on what your financial future may look like and if you’ve enough to see you through later life. Of course, there are still some variables to consider and who knows what the future may hold, but it does give you a great insight into whether you’re saving enough. Don’t wait until it’s too late to do anything about it.
Check out the Retirement Calculator and take back your independence
6. Save for your little ones
The sooner you can start to save money for your children or grandchildren, the better their financial health is likely to be in the future.
One of the popular accounts is the Junior ISA (JISA). JISAs cannot be accessed until the child becomes 18 but at that stage they will have unfettered access to the funds.
If you, your friends and family were able to gift a total of £9,000 a year to a child (the current Junior ISA allowance), at a rate of 4.95% (the current best JISA rate), you could give them almost £265,000 when they reach 18. Now that’s a gift worth having!
It is still important to keep an eye on the rate going forward, as it may be prudent to transfer at some stage. 18 years is a long time to expect an account to remain the most competitive available.
While children have their own allowances and could therefore earn tax free interest outside of a JISA, parents should be aware that there may be a tax liability to themselves on the interest earned on any money they gift to their children, until they reach the age of 18.
If the total gross interest earned on all cash gifted by each parent is more than £100 per year, then all of it (not just the excess) will be treated as that parent’s interest for tax purposes and therefore they may need to pay tax at their marginal rate - if it takes them above their Personal Allowance and/or Personal Savings Allowance.
If the gross interest earned is less than £100 for each parent’s gift, it is considered so minimal that parents do not need to declare it.
Gifts from any other family members or friends will not be viewed in the same way. Instead, any interest earned will be treated as belonging to the child themselves and therefore can be earned tax free if they are non-taxpayers.
The exception to this rule is on funds deposited into a JISA, Child Trust Fund or NS&I Premium Bonds. Any interest earned on the former two products have a specific exemption and so are simply tax free regardless of where the funds came from.
And prizes from Premium Bonds are not classed as interest, so are also exempt. It’s just as well, as it would be pretty shocking for a parent to have to pay income tax on a £1m prize!
There are some investment options available too such as paying into a pension for your little ones. Take a look at a recent article from our colleagues at TPO.
7. Let a platform take the strain
We know that for many, opening and switching multiple savings accounts can be a pain, therefore cash savings are often neglected which means savers are potentially leaving their cash languishing in poor paying accounts.
So why don’t people switch? Inertia has long been the savers’ enemy, with many people put off by the administration burden – actual or anticipated. And if you have a much larger sum of money in cash, you’ll normally need to open a plethora of accounts to keep it protected by the Financial Services Compensation Scheme (FSCS) – often with providers you may not have heard of, and are therefore concerned about their security.
The good news is that there are now a number of options for cash-rich but time-poor savers to earn more interest on their savings. This includes the use of cash savings platforms. These offer a simple way to improve the returns you are getting from poor paying accounts, especially with the high street banks - and you can split your funds so that you can ensure your money is protected by the Financial Services Compensation Scheme (FSCS).
Cash platforms have the potential to transform the savings market once people truly understand the benefits. They’re not necessarily for the rate chasers, as they are not whole of market, although they do often offer market-leading exclusive accounts. But where the real benefit comes in is for those savers with larger sums of money, who don’t have the time or energy to keep monitoring, then switching and splitting up money between accounts and providers to improve the rates they’re getting and keep that money protected.
But with a cash platform, just one application gives you access to multiple competitive accounts and multiple providers - from easy access to fixed rate bonds. Once set up, you're free to pick and choose from the products available at the time and open them with ease in a few simple steps – no more completing application after application.
We’ve been busy here at Savings Champion creating a solution for savers who are looking for a simple way to open and manage multiple savings accounts in one convenient place. So if this sounds like what you need to keep your savings competitive, why not request a free illustration, to find out the kind of returns you could be earning.
If you’d like to speak to an expert about getting your finances in order, why not get in touch. We’re currently offering all those with £100,000 or more in savings, investments or pensions a FREE financial planning review with one of our TPO colleagues, worth £500. You can find out more here.
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