Low interest rates and increasing inflation means your cash savings are going backwards in real terms. Today, the inflation rate is higher than any rate being offered by a Cash ISA. It is time to review what you are doing to make your money work for you.
Royal London estimates that money in cash ISAs lost 9% of its buying power over the last ten years in their report called “The Curse of Long Term Cash”. That is disappointing if you have been carefully saving your cash, only to be hit by increasing prices.
We all need savings that are easy to access for unexpected emergencies. If it is worth less when you take it out than when it went in, it’s not hard to see why it is a bad investment. An alternative way to be prepared for when the worse happens is with an appropriate insurance product
Income protection is designed to pay out a tax-free sum if you’re unable to work because of illness or injury. Depending on the policy, it pays out until you retire, die or return to work. Few employers will support you for more than a year if you’re unable to work, and given the low level of state benefits, it is worth considering.
And what about your debts? Paying interest on credit cards, personal loans car repayments means even less value from your cash. If you’re worried about liquidity, paying off your credit card every month is effectively your ’emergency fund’, available for use when you do need it suddenly.
A recent study by TSB Bank, found most homeowners could save £100 a month on their repayments by remortgaging. Over the life of a 3-year fixed rate mortgage, that’s £3,500. So, a better use of your money is to use your savings to pay down your mortgage. You could potentially remortgage at a much lower rate if you injected some more equity.
With savings rates poor across the board, you might be willing to think about investing. You can use all or some of your annual ISA allowance in a Stocks and Shares ISA. HMRC figures show, of the £81 billion we put into ISAs last year, around 20% was in Stocks and Shares ISAs. You don’t pay capital gains tax or income tax and can transfer money from an existing cash ISA without losing the tax benefits, and vice versa. £154 million was paid in capital gains tax to the government unnecessarily in 2014/15. Mainly by savers that had not used their ISA allowance.
Your pension is the most tax-efficient way of saving for the future. You can pay up to £40,000 per year a year into your pension tax-free if you are a basic or higher rate taxpayer. If you’re likely to go over, you can carry forward unused annual allowances from the last three tax years to increase your allowance this year.
If you are wed to the idea of keeping cash, current account interest rates have been beating Cash ISA rates for sometime now. The new personal savings allowance means higher-rate taxpayers can earn up to £500 a year in interest tax free. Basic rate payer’s allowance is £1,000
Most current accounts require you to have your monthly salary paid in and switch direct debits. Just check that you can meet any conditions before switching.
If this article resonated with you, you can access a neat trick for getting your savings under control in 2017 by clicking here
The Financial Conduct Authority does not regulate taxation and trust advice.
Your home may be at risk if you do not keep up with the repayments for a loan or mortgage secured on your property.
The value of investments will fluctuate, which will cause asset prices to fall as well as rise and you may not get back the original amount you invested.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.