In June 2023, the Bank of England’s Monetary Policy Committee (MPC) voted to raise interest rates to 5 percent. With the Bank of England base rate now at its highest level for 14 years, many banks and building societies are starting to pass on interest rate increases through to their savings accounts. This is good news for savers, not so good for borrowers.
As financial advisers, we always suggest having a cash ‘emergency pot’ as essential to a financial plan. In our opinion this should be ‘cash’, or readily available ‘easy access’ capital, amounting to at least six months’ income or spending.
Here we look at some key things to consider when it comes to cash savings.
For many years, there was little difference between the savings rates available, with the vast majority being pitifully low. Whilst everyday easy-access accounts are likely to keep their interest rates at a minimum, the picture is starting to change across savings accounts; and it really is worthwhile taking a look at the rates that are on the market. Please contact your adviser for a list of up-to-date rates available across a variety of savings accounts.
With interest rate increases, savers must be reminded that outside of Cash ISAs and Premium Bonds, interest does attract tax.
A Personal Savings Allowance (PSA) is available which means that basic rate taxpayers will not have to pay tax on the first £1,000 of savings income they receive. If a basic rate taxpayer deposits £50,000 into a savings account this could earn interest of 4%, that’s £2,000. Savings income above £1,000 will be taxed at the basic rate (20%). For higher rate (40%) taxpayers the PSA is £500 and is not available to additional rate (45%) taxpayers and will be taxed at the marginal rate.
Some savers will also benefit from the starting rate for savings meaning if non-savings income i.e., salary or rental income is less than the personal allowance, a 0% tax band applies on £5,000 savings income. So potentially a saver could pay no tax on savings income up to £17,570.
Cash ISAs are a good way to save without paying tax and the maximum ISA allowance is £20,000.
It may also be worth considering Premium Bonds. Instead of receiving interest payments, Premium Bonds holders are entered into a monthly draw. When someone invests in Premium Bonds they are allocated a series of numbers, one for each £1 invested. As well as two £1 million jackpot prizes, you can win anything from £25 to £100,000 (each month) for each Bond number you hold. Each month’s prize fund is equal to one month’s interest on the total value of all eligible bonds, with the annual prize rate being 3% from January 2023. Prizes are not guaranteed but whereas with a lottery ticket you don’t get your ticket money back if you don’t win in a draw, with NS&I Premium bonds, your deposit is safe you continue to participate in the monthly draw, and you can get your money back within 3-5 working days.
When it comes to cash savings held in the UK, there is a level of protection provided by the Financial Services Compensation Scheme (FSCS) against banks, building societies or credit unions going out of business. Each individual is allowed a maximum of £85,000 for each ‘authorised institution’ or banking group. Where possible, it is therefore advisable that any funds clients hold in cash stay within these limits; which may mean splitting funds across banking groups. The limit of protection for joint accounts is £170,000.
It is worth a reminder here that outside of the normal limit of £85,000 provided by the FSCS, there is also an additional protection available for ‘temporary high balances’. Where certain life events have resulted in a temporary high balance in a bank account protection of up to £1million is available for a period for 6 months. There are several causes of temporary high balance that are protected, which include Divorce or dissolution of a civil partnership, personal injury compensation, sale of a main residence or benefits payable under an insurance policy.
A full list of the allowable reasons for a temporary high balance can be found here.
If you are concerned with depositor protection then there are National Savings & Investment (NS&I) products such as the Direct Saver account & Income Bonds which are 100% backed by HM Treasury therefore minimal chance of the ‘product issuer’ defaulting.
With the rate of inflation far outpacing the rates of interest available, investors should be mindful of the levels of cash held within their portfolios as an overall percentage. However, there are certainly more opportunities now than in many years to make the most of cash balances.
To discuss any of the above, please get in touch with our advisers.