Written by Karen Bryan
With interest rates creeping ever lower, I am seriously wondering if it makes much sense to save money. The highest rate of interest I can find on a tax free Cash ISA account is 3.0% in the First Direct ISA. However you need Cash ISA savings of at least £40,000 to get this rate.
For people with less than £40,00 in Cash ISA savings, the highest current rate is 2.8% (guaranteed until 31 December 2013) in the Coventry 60 Day Notice Cash ISA.
Inflation (RPI) stands at 3.0%. Therefore, the best you can hope for at present is maintain the spending power of savings which are held in the highest rate Cash ISA account. If you earn a lower rate of interest, or have your savings in a standard savings account on which you have to pay 20% tax on the interest you receive, your savings are losing value.
Fortunately, this isn’t an imminent problem for us. In 2009 I put most of our savings, that weren’t already held in Cash ISAs, into a National Savings & Investments (NS&I) 5 Year Guaranteed Growth Bond paying 4.6%, which matures in late 2014. At that time, I was unsure of whether I wanted to tie up some of our savings in an account for such a long period and 4.6% wasn’t looking like a great rate of interest. Funny how things change, as the best rate of interest for a five year fixed rate account is currently 3.05% with First Save, which requires a minimum of deposit of £1,000. Most of our cash ISAs are in two year fixed rate accounts, paying around 4%, due to mature in the first half of 2014.
The current low rate interest environment is predicted to continue for several years, with some commentators saying that the Bank of England base rate won’t go up until 2017 and may even fall for a few months in 2014. This means that we have to start thinking about what on earth we are going to do with our savings when the NS&I account and Cash ISAs mature next year.
There’s so much talk about encouraging people to save more money, but little incentive to do this if you can’t get a real return on your savings. The Government could do a lot more by doubling the Cash ISA annual savings limit, to match that of the Stocks & Shares ISA. This would shield more interest on savings from tax, helping avoid paying tax twice on savings, once when you earn the money and then again on interest earned.
Are you also starting to question if it’s worth saving in the current economic climate?