Saving in the Bank, or under the Bed?
Introduction
The financial crisis, although far from being solely a British problem has, nevertheless, had a profound effect on the British financial services industry. Billions of pounds of taxpayers' money has been spent on recapitalising the likes of Royal Bank of Scotland (RBS) and Lloyds Banking Group, and the Bank of England has been forced to make successive cuts in the Bank Rate, and embark upon a programme of so-called "quantitative easing", in a effort to rescue the economy from the depths of recession. Cumulative cuts in the Bank Rate, from 5.0% in October, 2008, to 1.0% in February, 2009 (subsequently to 0.5%, in March) meant that the average interest rate for instant access savings accounts in the U.K. was barely above zero, at 0.17%, at the end of February, and the average interest rate for notice accounts was not much better, at just 0.18%, notwithstanding any further reductions resulting from the latest 0.5% cut. Furthermore, the average interest rate for cash ISAs ("Individual Savings Accounts") was less than 1% at the end of February, compared with just over 5% a year earlier. Thankfully, the Governor of the Bank of England has gone on the record, stating that it is highly unlikely that the Bank Rate will fall below 0.5%.
Savings Considerations
Plummeting interest rates are not the only concern for British savers; there still remains the possibility – albeit highly unlikely – of financial institutions failing completely, and a number of measures have been introduced by the Government since the start of the financial crisis to protect savers from such eventualities.
Following the crisis at Northern Rock, in October, 2007, the threshold for bank deposits guaranteed by the Government in the event of failure was raised from the first £35,000 to the first £50,000 per customer, per institution. This effectively means that if you have £50,000, or less, deposited in U.K. bank, building society or credit union, it is fully protected. Similar comments apply to banks from outside Europe, which must, by law, create U.K. subsidiaries and become members of the FSCS ("Financial Services Compensation Scheme") in order to operate in the U.K.. Banks in the European Economic Area – that is, in European Union countries, Iceland, Lichtenstein and Norway – must offer compensation for at least the first €20,000 invested, through their own domestic schemes and may have an arrangement with the FSCS for compensation up to a total of £50,000. Arrangements vary from institution to institution, so if you are in any doubt as to whether you savings are fully protected, contact your bank and ask.
Savings accounts of all denominations have, undoubtedly, taken a drubbing in recent times, but in good times and bad there are always some forms of saving that provide better returns than others. If you have an ordinary savings account, you earn interest on your savings – albeit at a pretty paltry rate, nowadays – but you also pay tax on any interest you receive. This amounts to 20%, if you pay income tax at the basic rate, or 40%, if you pay income tax at the higher rate. However, if you have an ISA account, not only is the interest rate higher than that of an ordinary savings account, but any interest is completely tax free. There is, understandably, a limit – of £3,600 per fiscal year – that you can place in a cash ISA, but if you open an account before 5th April, 2009, you can place £3,600 in the account immediately, and a further £3,600 after the end of the fiscal year, on 6th April. Amazingly, as many as 66% of British savers are not using the whole of their ISA allowances, according to recent figures. 20% tax may not seem very much, but it is still 20% of your interest that you are giving up unnecessarily, and a cash ISA is something that all savers should seriously consider.
Another common mistake is to assume that mainstream High Street lenders – the "household names", if you like – always offer the best interest rates on savings accounts, because this is not necessarily true. Less well-known lenders, such as National Savings & Investments, or credit unions – of which there are more than 500 across the U.K. – often offer equally, or more, competitive rates than their High Street counterparts. Chasing the absolute best savings rate all the time can become tiresome, so, above all, make sure that you invest your money in a savings account with an interest rate above the market average and above the rate of inflation.