Tag Archive | "savings"

Inflation hits ZERO; NS&I to Drop Easy Access ISA Rate

There is a downside to the Bank of England setting their base rate so low for so long. When it’s next-to-nothing and the financial markets get used to it, it triggers trends. It’s those trends we see across the spectrum of the financial sector, reflecting that the 0.5% base lending rate has been with us now for above six and a half years.

Whilst it’s great for borrowers, it’s dismal for savers. Throw in an inflation rate of 0% (as the markets reported yesterday) and money in the bank is worth exactly what it says on your passbook. If you’ve £10 in a savings account today, unless the markets change dramatically, after tax it’ll be worth little more than a tenner this time next year.

One of the last bastions of upholding a semi-decent interest rate, NS&I, has dealt savers a “bitter blow”. From the middle of November, its ISAs will only offer 1.25% interest, a drop of a quarter of one percent.

ISAs are still here, but for limited dividends only

ISAs have long been a traditional savings mechanism for contractors, in particular for the dividend investment that these savings accounts accommodate. In an attempt to get more of the general public saving, the government opened up the full extent of ISAs to cash savers, too.

Prior to this change, the most anyone could deposit in cash was 50% of your total ISA allowance. For 2015/16, the maximum tax-free annual deposit into an ISA account is £15,240.

When you open your account, you can choose all cash, all dividend or the original half-and-half. So even after amendments, contractors still have a safe haven for their company dividends if they choose wisely from the outset.

However, the latest drop in easy-access ISA interest rates will do little to encourage the saving the government envisaged upon making all-cash ISAs available.

Would a raise in the BoE base rate help?

Just as it takes a while for banks and lenders to drop their rates in line with the BoE, the same is true for the knock-on effect of any increases.

Mark Carney, the Bank of England governor, has hinted that the base rate will rise sooner rather than later. But with each month that passes, pundits release bated breath as the Monetary Policy Committee confirms it’s sticking to its guns.

But the MPC’s decision may change after the next meeting. The Retail Price Index, upon which inflation is based, dropped by 0.1% in August (predominantly fuelled by fuel) to a flatline zero.

What does that mean? In theory, it means that if a bottle of milk cost you £1.25 in August last year, it still cost you £1.25 this August, too.

The BoE may well have been waiting for inflation to drop back to this point (or perhaps even see if it turns negative) before changing the base rate. But even if we get the long-awaited rise, don’t expect to see your savings interest rates rise any time soon.

Banks will not giveth before they receiveth

Before giving anything back, the banks will increase mortgage interest rates to get a positive cashflow, first. Only when those rates settle will savers see the benefit of a BoE rise in interest rates.

The savvy among you will have a lightbulb above your head right about now. That’s because another favourite savings mechanism for many contractors is investing in Buy-To-Let mortgages. If you feel your ISA isn’t performing as well it ought, perhaps a brick and mortar investment may offer a sounder platform for your future.

But don’t hang about for too long. Like I say, all lenders are watching Carney and Co. As soon as the base rate rises, so will mortgage interest rates. On your marks…

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Cost saving ideas can win the day for contractor accountants

Contractor accountants may want to consider working alongside their clients to come up with cost saving measures after the ICAEW said this year promises to be extremely difficult financially for many companies.

The combination of low consumer confidence and public sector spending cuts will have a considerable impact on their revenue generating ability, the Institute warns.

ICAEW’s head of enterprise, Clive Lewis, said that despite the recent decrease, inflation is still high, but this is only one of many pressures facing companies at the moment.

In order to offset increased costs, the Institute has put forward a number of suggestions which could interest accountants, such as whether profit margins can be increased. It also suggests re-examining the fundamentals of products and services but warns against switching to cheap materials which could damage a brand and affect sales.

A lot of suppliers are offering incentives and there could be benefits to changing. There are now new suppliers with competitive prices in the market place and things could have changed significantly since a company’s supplier base was last reviewed.

Businesses should also tackle overheads such as energy costs, human resources and space. Significant improvements can be gleaned by more effective organisation of workloads and workspaces.

Leveraging the power of technology enables employees to work better, reduces the need for meetings and cuts down on communication costs, the Institute advises and companies can further cut down by taking advantage of all the tax allowances and reliefs they are entitled to.

KPMG recently reported that businesses could see £90bn added to their costs as the savings they made during the recession get wiped out. 80% of business leaders say the cost of finance is outstripping their cost-cutting efforts, whilst 76% blame salary inflation.

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Rainy day savings are making a comeback

The recession has fuelled an increase in rainy day savings, according to Jonathan Davis, an economist at Jonathan Davis Wealth Management.

In fact a recent survey from Mintel found that around 43% of Britons have prioritised saving for a rainy day this year, up from just 15% last year.

Davis said the credit crisis was a wake-up call for a lot of people, who realised that for the last ten years they have based their life on debt.

This is a little like closing the stable door after the horse has bolted but it is still encouraging that people are now looking to give themselves a financial cushion in case of a disaster such as redundancy. Savers should have a reserve fund equal to at least six months average spending, to get them through unforeseen difficulties, advised Davis.

Although rainy day saving may be on the increase, few people are saving for their retirement and this is of paramount importance, the expert added.

Savers may not be so happy to learn that the Bank of England has forecast that inflation is going to stay above its 2% target well into next year. Currently the CPI is standing at an annual rate of 3.1%, meaning a basic rate taxpayer needs a savings account that pays at least 3.8% in order to protect the value of their investment.

Now could well be the time for contractors to sit down with their contractor accountant and take a good look at incomings and outgoings and decide how to maximise your assets.

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Female contractor accountants should start saving now

One expert is advising women to make financial provision for their own retirement rather than depending on their partner for support.

Tony McPhail, from Hargreaves Lansdown, says that women should have an extra incentive to save money for their retirement as they are more likely to suffer financial hardship in old age.

Women tend to live longer than men and because many women take career breaks to have children, they end up with less retirement savings rights. Add to that the fact that husbands often save in a pension scheme that dies with them, leaving the widow without an income, and it is easy to see why women need to take more of a forward thinking approach to retirement.

McPhail made his comments after a survey by Prudential revealed that more than 1 in 4 employed women (28%) aged 40 and above plan to survive on their husband’s pension after they’ve left work.

However, there is growing concern that the majority of people will not have saved anywhere near enough money during their employment to enable them to enjoy their retirement. A recent survey from Aviva found that every adult will need to save on average £10,300 a year in order to retire comfortably.

The senior policy adviser for the National Association of Pension Funds, James Walsh, said that we are facing a pensions crisis in the UK and the sooner people start planning for their retirement, the better. In fact the UK is in the unenviable position of having the largest per person pensions gap in all of Europe, followed by Germany, the Republic of Ireland, France, Spain and Russia.

© 2010 All rights reserved. Reproduction in whole or in part without permission is prohibited.

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