Given the state of agriculture over the past year, interest rates on savings haven’t been a major worry for farming families. Thanks to a record period of low interest rates, since 2009, returns on savings have been derisory and only a low rate of inflation over the past year has allowed them to match inflation.
The bottom line remains that there’s no incentive to be a saver when returns have averaged points of a per cent. This reflects the low base rate, but banks are enjoying a big margin between what they pay in interest and the rates at which they lend. This is because the world is awash with cash savings as people become more risk averse, making it a seller’s market for the banks.
The final blow to meagre returns is when interest is deducted, but since 6th April this year that’s changed. All basic rate taxpayers will now have a personal saver’s allowance of £1,000. Ironically this is reduced to £500 for anyone paying higher rate tax, who are more likely to have savings, and is eliminated for the lucky few super-rich paying additional tax at 45%. This means most people will no longer be paying tax on savings and includes not only bank accounts, but National Savings and Investment products, corporate bonds, other bonds and peer-to-peer lending arrangements. Interest will now be paid gross on all accounts and HMRC will calculate any tax due, taking this via your tax code or self-assessment form.
This is good news, but probably the death knell for cash ISAs, which are now irrelevant. In the present financial climate exceeding the tax-free figure will be difficult. But remember, a few pounds in interest could tip you into the higher tax rate if you’re on the edge – and that automatically cuts the tax-free figure in half; another incentive to put savings in a joint account.
If buying long-term bonds, read the small print for when the interest is added. The £1,000 allowance, or the £500, is for one year only and can’t be carried forward. If interest on a bond is all paid in the final year it could tip you out of the tax-free rate, reducing the annual value of the bond. These are, however, minor issues, and the Government deserves credit for a decision that at least offers something to savers who’ve been the losers in the financial game for seven years.
On the theme of savings, low interest rates are driving people to look at alternatives. What are known as crowd funding arrangements or peer-to-peer lending have become popular, as they offer higher rates than banks, but remember profit, as always, is a reward for risk. Even some organisations that advertise on television and look like banks are in fact peer-to-peer lenders, often investing in property.
You can make your own judgements about the risk/reward ratio, but remember these organisations offer no guarantees. Put your money into a recognised bank trading in the UK and it will be covered up to £75,000 through the statutory Financial Services Compensation Scheme – double that for joint accounts. With peer-to-peer lending there is no protection and you must be aware that you’re gambling rather than making a safe investment. You need to decide how great the gamble is and how much you’re willing to risk for a bigger return.
A list of banks approved through what is known as the Prudential Regulatory Authority (PRA), which has nothing to do with the insurer, is available on its website.