As we move forward into a new year, many of us will be thinking of ways to make improvements or to get around to things that we haven’t found time for yet. Of course, there are many types of New Year’s resolutions, but there will be plenty of us that are determined to improve our financial situation in the coming 12 months, so we thought it would be a great time to share some top tips for 2022.
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, no doubt many of you will have watched with trepidation the rapidly rising rate of inflation that we are all feeling the effects of.
Unfortunately, with energy prices set to rise further when Ofgem lifts the price cap on household gas and electricity bills, and with ongoing supply and demand issues of many other goods and services, the Bank of England has warned that inflation could reach 6% by the Spring
So, there doesn’t appear to be a swift end in sight to higher inflation which is a real problem for savers as there are currently no savings accounts that can keep in line with the rising cost of living.
As our easy to use Inflation Calculator illustrates, high inflation and low interest rates is a toxic relationship that can erode the real value of our money without us really realising it. So, if you have too much of your money in cash, now could be the time to look at if there are any alternative options that could protect at least some of your life savings.
2. Is a cash Isa the right choice for you?
Since the introduction of the Personal Savings Allowance (PSA) in 2016, many people no longer pay tax on their savings and therefore, despite the tax-free interest that is earned on cash Isas, they may not be the best choice for this valuable annual allowance. As a result, savers and providers alike seem to have turned their backs on this stalwart of the savings market and along with the amounts being deposited, the rates on offer have plummeted.
According to the Bank of England, in January 2021 there was £294.5 billion in cash ISAs. By October the amount had fallen to £292.7 billion.
Even those who have fully used their PSA, and therefore pay basic rate tax on their savings interest, could earn more net interest on a standard non Isa fixed term bond. For example, the best 1 year fixed rate cash Isa is paying 0.93% AER (Shawbrook Bank) which is far lower than the best 12 month fixed rate bond with Investec paying 1.36% AER – the rate after the deduction of 20% tax is 1.09% AER. And let’s not forget Sharia Fixed Term Bonds as the best 1 year account with Gatehouse Bank is paying 1.41% AER, which is 1.13% after the deduction of basic rate tax.
In 2021, the worst cash Isas on the market, many of which were being offered by the high street banks, paid loyal savers as little as £2 over the course of the year on a deposit of £20,000! This is shocking, but for those who a cash Isa is still important, they don’t have to put up with such poor rates as far better Isas can be found. Take a look at our Variable Rate Isa and Fixed Rate Isa Best Buy tables.
With rates on cash products well below the rate of inflation, which is currently 5.1%, a stocks and shares Isa could be a more attractive option for those who are able to tie their money up for at least five years to allow for the volatility will inevitably occur when investing into stocks and shares.
As Alex Shields, Chartered Financial Planner at The Private Office (TPO) says “If you have not invested before, it is important that you are comfortable with the bumps in the road associated with investing, which can be a shock to those used to savings accounts where the capital value does not fluctuate.”
3. Ditch & Switch
We are all waiting for the banks and building societies to react to the Bank of England base rate hike in December. However, for some people, even in the unlikely event that their provider does raise rates by the full 0.15% base rate increase, they will still be earning a shockingly poor rate of interest.
The high street banks are currently all paying as low as 0.01% on their easy access accounts, whereas the best rate that is currently available with Shawbrook Bank is 0.67% AER. On a balance of £10,000 that’s the difference in earning £1 or £67 a year. Better still if you moved that money into the best 1 year Fixed Term Bond and you’d be looking at 1.41% with Gatehouse Bank, so £141 a year. If someone handed you £140, would you say no?
If your provider is not treating your as they should, then vote with your feet and switch somewhere else in order to earn more!
4. To fix or not to fix?
The average Fixed Term Bond rate has been steadily increasing since a low point in May last year when the average rate stood at just 0.53% - today it is 0.93%, so a significant improvement.
The average rate of a 1 Year Fixed Rate Bond is currently 0.74% - the highest it’s been since June 2020 when the average rate was 0.81% AER, up from a low point of 0.41% in May 2021.
As there had only been the one base rate increase over that time, which has only just occurred, these increases have not been as a result of a change to the base rate rise. Instead, it has more to do with the market’s expectation that there would be a base rate rise, which has finally come to fruition – but also a healthy dose of competition among the lesser known, challenger banks.
So, a big question that many people have is whether they should put some of their cash into a fixed rate bond or wait to see if there are better rates to come? This is always a tough one to answer as of course we don’t know what is round the corner, and while there could be further base rate rises to come, there are other factors that could change this.
What we do know is that if you have all your money in easy access, as most people do - 87% of the savings market in these accounts - even if you are earning the best rate currently available, you could be earning more if you are willing to tie some of it up, as mentioned above. The risk of course is locking in when improved rates could be around the corner. That said, locking in for the short term could improve your returns with less risk of being tied in for too long. And in truth, even if the base rate continues to increase this year, we don’t expect to see rates rocketing over this time.
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.
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.