Saving is supposed to be simple, but following the devastation that occurred as a result of the introduction of the Funding for Lending Scheme in 2012, the government has been trying to appease savers by introducing a series of incentives to encourage more people to save.
To name just a few:
Lifetime Isa due to be introduced in April 2017
Reducing the 10 per cent starting of rate of tax for saving, to 0 per cent
Allowing the full Isa allowance in cash
Allowing the transfer of stocks and shares Isas into cash
Inheritance of Isa allowance from spouse
Help to Buy Isa
Help to Save Scheme
Personal Savings Allowance
Isa allowance to increase to £20,000 from April 2017.
But as interest rates on savings accounts continue to fall, many people are simply asking: “What is the point?”
The first blow to savers came in 2008, when the full force of the financial crisis made the Bank of England base rate drop rapidly, until it hit its current level of 0.5 per cent in March 2009.
Few would have predicted that we would still be here, over seven years later, and worse still this wasn’t the biggest issue for savers. Even after record falls in the base rate, savers could still achieve rates of about 3 per cent on easy access accounts in 2012, which in the current climate looks extremely competitive.
While industry commentators predicted that rates were at their lowest levels, the government pulled out all the stops to curb a potential lending crisis, and in turn boost the housing market, with the launch of the Funding for Lending Scheme (FLS) in August 2012. The knock-on effect was catastrophic to savers. Rates on best buy savings accounts dropped like a stone, shortly followed by a tidal wave of rate reductions for existing savers: a practice that was very rare outside of a change in the base rate. Now over 4,000 rate reductions have been made to existing savings accounts, even though the base rate is unchanged and the best easy access account available to new savers is paying 1.45 per cent gross/AER – less than half that of the rates available before the introduction of the FLS.
The saving grace has come in the form of so-called challenger banks. Savings providers with unfamiliar names, taking advantage of this low-interest-rate environment, now dominate many of the best-buy tables – offering what little competition there has been over the past few years.
The good news is that these providers are becoming more prolific and are doing an excellent job of raising their profiles – which means that savers don’t have to apply blindly. They can rest assured that the press and experts such as Savings Champion have done some due diligence and at the very least confirmed that they are part of the Financial Services Compensation Scheme, and therefore up to £75,000 per person is protected should the worst happen.
The market as it once was has gone. But many savers are yet to catch on.
Most savers are loyal to their bank. A study by the Financial Conduct Authority into the savings market confirmed that many savers leave their cash with their personal current account (PCA) provider, even though the savings rates on offer are normally appalling. The FCA’s data showed that for the largest PCA providers, over 80 per cent of their total balances in easy access savings accounts is held by consumers who also hold a PCA with the same provider.
The same study identified that there is over £160bn in easy access accounts that pay 0.5 per cent or less. Indeed, shockingly, many accounts pay no more than 0.1 per cent and this can fall to as little as 0.01 per cent. Even in this historically low-interest-rate environment, by switching into the best-paying easy access savings account paying 1.45 per cent, on £75,000, that could attract an increase of over £1,000 gross per year. That’s a rise from £7.50 to £1,087.50 per year, for doing virtually nothing but being aware of what is available.
It seems that convenience drives savers to use the same provider for their current account and savings, which makes some sense, but it plays into the hands of these providers.
And with the rise of the challenger banks and online savings accounts, transferring from a competitive savings account into your bank account has never been easier – so it’s time for savers to become more modern! And the prize is a higher return.
Saving just became less taxing
Where once choosing a savings account was a fairly simple affair, recently it has become a lot more complicated. The biggest change in a generation came into force on 6 April this year, with the introduction of the new Personal Savings Allowance, giving all basic-rate taxpayers the first £1,000 of interest earned tax-free and higher-rate taxpayers the first £500 tax free. But while most savers won’t need to do anything but choose the best-paying account, some savers may be caught out. Any tax that is due will come out of the PAYE system, but given that codes are being calculated now based on balances over the past year, many savers are already finding errors in their codes.
Or perhaps more taxing?
So, in theory, the Personal Savings Allowance is great news for savers – but it adds an extra layer of complication when it comes to choosing the best account. For many, cash Isas were always a go-to option every tax year, as any interest earned is tax-free, regardless of the amount and those who have saved the maximum over the past 17 years could now have kept over £100,000 out of the taxman’s grasp.
There have been lots of changes to cash Isas over the past couple of years to make them more appealing.
Back in July 2014, the government announced an increase to the overall Isa allowance to take it to £15,000 and, more importantly for savers, an overhaul of the Isa rules, which means that savers can now fully utilise their Isa allowance even if they do not want to invest into the stock market. The whole allowance can now be used to fund a cash Isa, as opposed to just half the allowance previously. Also, for the first time, under the rule change, savers could transfer their stocks and shares Isa into a cash Isa if they wanted to reduce the risk of their investment portfolio and still retain its tax-efficient status. Next came the ability for a spouse to inherit his or her deceased partner’s Isa allowance and the introduction of the Help to Buy Isa in December 2015.
The recent spring Budget has seen brought another savings incentive in the form of the Lifetime Isa, due to be made available by April 2017. This will be very attractive to many, regardless of the interest rates on offer, as a generous 25 per cent bonus applied annually on savings up to £4,000 per year will dwarf the interest earned.
Ironically, after all of these improvements to the Isa, the introduction of the Personal Savings Allowance looks certain to sound the death knell for this once popular savings vehicle, as many will fail to see the point in putting money into an account which is now paying a lower rate of interest than its non-Isa equivalent.
It’s fair to say that the take-up of cash Isas in the past has not been as high as experts would have expected, one reason cited being that people found them complicated, which meant that many would simply stay put in a poor-paying account, paying tax they did not need to pay.
The concern is that although these new saving incentives should encourage more people to save, the complexity that comes with all the new rules may simply lead many to decide to do nothing at all, for fear of making the wrong choice. So once again is it our inertia – and therefore the big banks – that are the real winners?