The Times - UK (2022-01-01)

the times | Saturday January 1 2022 55

Money

Here’s how to beat inflation Pages 58-59

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avers hammered by inflation, tax rises and higher mortgage bills this year will struggle more than ever to get a real return from their cash Isas. A record 23 accounts paid 0.1 per cent or less last year, and six paid a measly 0.01 per cent. In 2020 only 12 cash Isas paid less than 0.1 per cent. Barclays, First Direct and HSBC banks and Nationwide, Principality, Ipswich, Monmouthshire and West Bromwich building societies were among those paying 10p interest on every £100 saved, according to the website Savings Champion. On the full annual Isa allowance of £20,000 savers would have earned £20 interest. Halifax, NatWest, Royal Bank of Scotland, Santander and Ulster Bank pay even less. Their rate of 0.01 per cent amounts to 1p interest on every £100 saved. Scottish Widows Bank cut its E-Cash Isa 3 rate from 0.05 per cent to 0.01 per cent in May. The reduction meant that savers with £20,000 stashed away earned £5.16 over the year. The tax benefits of cash Isas make them attractive to some higher-rate taxpayers and savers who don’t want to invest their money, but for anyone else their value is questionable. All interest

on them is tax-free, but with rates now so low on all but a handful of accounts, it can work out better to pay the tax on a non-Isa savings account that offers higher interest. Basic-rate taxpayers can earn £1,000 interest a year tax-free. You would need to have saved £70,920 in Gatehouse Bank’s one-year fixed bond paying 1.41 per cent to earn more than this limit. Higher-rate taxpayers can earn

£500 interest tax-free and additional- rate taxpayers do not get an allowance. You would need to have £141,000 in Investec’s easy-access account, which pays 0.71 per cent, the best rate on the market, to earn more than £1,000 interest in a year. Savers have found that getting interest of more than 1 per cent for their cash deposits is as difficult as finding a lateral flow test. Since the financial crisis in

2008 rates have been rock bottom, and banks have had no appetite to tempt savers because they are awash with cheap government money under quantitative easing. While mortgages and borrowing have never been cheaper, it has been a terrible decade for the prudent. The average rate on a cash Isa fell to an all-time low of 0.4 per cent in April last year — the month after the Bank of England base rate hit its lowest point of 0.1 per cent. In March 2020, before the pandemic, the average cash Isa rate was 1.31 per cent. The best one-year fixed Isa rate is 0.93 per cent from Shawbrook Bank. On the full Isa allowance of £20,000 you would earn £186, compared with £282 from Gatehouse’s one-year non-Isa bond paying 1.41 per cent. The best easy- -access Isa rate is 0.67 per cent, from Shawbrook Bank. You need £1,000 to open an account and can transfer old Isas. On £20,000 you would earn £134 interest a year.

It is worth considering whether you really need to keep your savings in cash during this time of record-low savings rates and high inflation. According to the Financial Conduct Authority, the City regulator, 8.6 million savers each have more than £10,000 in cash that could be invested instead. Between April 2020 and October 2021 the amount held in cash Isas fell from £296.3 billion to £290.9 billion, according to the Bank of England. Over the same period savings in standard easy-access accounts rose from £799.2 billion to £968.2 billion. Money that is not needed for five years is likely to pro- duce a better return if held in funds or stocks. The FTSE 100 — the index of the UK’s largest companies by value — went up 13.2 per cent in 2021, returning to pre-pandemic levels. The FTSE 100 returned 26.6 per cent over the past five years, including dividends.

£5.4bn

taken out of cash Isas between April 2020 and October last year

Where to get a decent rate

If you can lock up your money for a year or longer, you are likely to be better off in a regular savings account than an Isa. While Isas allow you to save up to £20,000 a year tax-free, the rates for longer-term accounts are generally poor. Gatehouse Bank’s 1.4 1 per cent rate is the best on a one-year fixed account. This would work out at 1.13 per cent

if you pay tax on your interest, but that won’t affect most people because basic-rate taxpayers can earn £1,000 a year interest on savings tax-free, and higher-rate taxpayers can earn £500. Shawbrook Bank’s 0.93 per cent is the highest rate available on a one-year fixed-term cash Isa. The best easy-access account, from Investec,

pays 0.71 per cent, and the best easy-access Isa, from Shawbrook, offers 0.67 per cent. With rates on cash savings at record lows, the stock market offers returns that are more likely to match inflation. Consider this option only if you are happy to lock in your cash for at least five years. For investment ideas, see pages 58-59. David Brenchley

Is it time to ditch the cash Isa?

Last year was a terrible one for saving, even worse than the year before. George Nixon considers the alternatives

O

ver the next six weeks Times Money Mentors will become personal trainers for the Evenden family to help them to become financially fit. Rachel and Sam Evenden, both 35, have asked for our help in overhauling their finances, and you can join them by signing up with Money Mentor. The Evendens, who have a three-year-old son, Kit and who earn a combined income of £80,000 aren’t sure if they are making the most of their money. The couple joined the race for space in the summer when they sold their flat in London to buy a three-bedroom house in Sevenoaks in Kent. One big perk of their new home is that it has space for a studio for Sam, who works as head of video at a marketing agency. At the moment the family’s biggest financial concern is the cost of

renovating their home, which is expected to set them back about £80,000. They are living with Rachel’s parents while the work is being done. They pay £500 a month into their regular savings accounts and have built up an emergency fund of £15,000. But it is earning only 0.75 per cent interest, so they are keen to start investing and would like advice. Our Money Mentors will help them to set financial goals once their house renovation is complete, and look at their outgoings to see if they can make savings. They have been considering using a stocks and shares Isa to build a nest egg and would like to open a Junior Isa for Kit so he has a pot of money when he’s 18 that he can use for university or a house deposit. They are also worried that they might not be

contributing enough into their pensions to have a comfortable retirement. They pay the minimum required under auto-enrolment — 5 per cent of their

only work part-time,” said Rachel, who works for a children’s newspaper called First News. “Now that we have our son we don’t have as much spare cash

as we used to. We want to know we will have a decent pension. I feel like we should be aiming towards that rather than just hoping it will be enough.”

‘New year, new

financial plan

for our family’

salary — and their employers contribute 3 per cent. “Our pensions have been a bit neglected over the past few years, particularly as I now

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Rachel Evenden wants to save for her son, Kit

Money Mentor

The Times - UK (2022-01-01)

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