What’s coming in 2016
There are a few big changes that will effect savers in 2016.
Financial Services Compensation Scheme (FSCS) protection reduction
The first is the reduction in the Financial Services Compensation Scheme from £85,000 – down to £75,000 which came into effect on 1 January 2016. Cautious savers may want to rearrange accounts in order to remain within the limits – but it is also important just to be aware of the change.
If you have more than £100,000 in your savings pot and are looking for advice on where to save, whilst keeping your money fully protected, speak to one of our savings advisers about our Concierge Cash Management Service on 0800 321 3581.
Personal Savings Allowance (PSA)
The Personal Savings Allowance will be introduced on 6th April 2016. According to the government, 95% of people will not have to pay tax on the first £1,000 (or £500 for higher rate taxpayers) of interest they earn on their savings.
The new PSA is great news and means that many savers will earn a significant amount of their savings interest, if not all of it, tax free.
UK Savers will be more than happy to see the extra money in their pockets, having suffered so much with low interest rates for such a long time.
Because of the introduction of the PSA, Banks and Building Societies will no longer take 20% income tax automatically from interest paid, so eligible savers will not need to register for gross interest. This is good news as it means that the many that don’t take advantage now, will be able to do so.
Although the PSA doesn’t start until the new tax year, savers can actually take advantage immediately if they choose an account that doesn’t pay out any interest until the new tax year, so something to consider when choosing a savings account today.
Because of the introduction of the PSA, many people may believe that the Cash ISA is no longer necessary. However, we believe there is definitely still a place for them. As any interest earned in a cash ISA will not count towards the new PSA, it is still a tax-free allowance, so can be used in conjunction with the new PSA.
What it means is that savers will have greater flexibility, as they will be able to choose from the very best savings available to them, which could be a Cash ISA, a normal savings account, or even a high interest current account.
When interest rates rise in the future, less capital will be required to fully utilise the PSA, therefore many savers will be pleased that they didn’t turn their back on the good old Cash ISA.
Let’s hope that the banks and building societies don’t start to neglect cash ISAs.
Also at the beginning of the new tax year, new rules are being introduced to make ISAs more flexible. Under the current rules, a saver is only able to save a maximum of the annual limit (currently £15,240) in an ISA each tax year. Where they withdraw sums from the ISA (in the current tax year) and subsequently replace all, or some, of that money, the replacement counts as a new subscription for the purposes of the annual ISA limit.
The new rules will allow savers to replace cash they have withdrawn from their ISA earlier in a tax year, without this replacement counting towards the limit on how much they can save in an ISA for that year. This flexibility will be available to savers, subject to the terms and conditions of their ISA.
And are we finally going to see a base rate rise in 2016?
Speculation continues to mount that 2016 will be the year of the first rise in the Bank of England base rate for almost 7 years.
A rise in the base rate should mean a rise in savings rates, however things are not as straightforward as that. Since the Funding for Lending scheme (FLS) was introduced in August 2012, there has been a huge disconnect between the Bank of England base rate and the rates paid on variable rate savings accounts. Although the base rate has remained at 0.50% for nearly seven years, there have been thousands of cuts made to existing savings accounts. And the rates on new accounts have fallen and risen due to competition in the market, rather than anything to do with the base rate. So even if the base rate does rise, it might not have the impact many would expect on the best buy rates available.
Having said this, it will be very disappointing not to see most providers pass on at least the first interest rate rise in full to their existing savers. Whether they will pass on in full any future rises, we will have to wait and see.
So, rather than any increase in the Bank of England base rate having an effect on the best buy savings accounts rates available, we believe it’ll be continued competition between the challenger banks that could drive rates up further. And with even more banks waiting in the wings to launch this year, we're hoping even more competition is on its way.
So what can savers do? It's all about balance and certainly for those with larger sums of cash, a mix of accounts should help to secure the very best rates now, while keeping some money aside in accessible accounts, should better rates become available in the future. To learn more about this and how we might be able to help, call one of our savings advisers on 0800 321 3581.