Following my last blog, I have been looking at the current market for deposit savings rates and the possible investment alternatives available.
With what appears to be some greater ' stability' in the expectations of very low base rates (currently 0.5%) and the significant likelihood of additional Quantitative Easing to help UK cash flow further. I am sure many mortgage borrowers will be delighted at this potential prospect. The Bank of England also suggests that there will be no further expectation of the UK falling into recession, although other fiscal think-tanks currently think otherwise.
But what could this mean for savers over the next 12-24 months?
Savings rates
We have seen savings rates climbing over the last year, which is good news for deposit savers. This is not a guarantee of a future trend. However, I have provided some examples below to reference this:
1 year Fixed
AA | 3.60% Gross AER | 12months Interest paid annually |
Post Office | 3.25% Gross AER | 12months Interest paid at maturity |
3 year Fixed
Saga | 4.00% Gross AER | 36months Interest paid annually |
These rates are correct at the time of writing this Blog (February 2012). Other offers are available.
- Deposit interest earned (outside an ISA allowance) is taxable at your highest marginal income tax rates. Please check the terms and conditions of each plan/offer before investing.
- Please remember the Deposit Protection Limit of £85,000 for a single investor when planning your savings strategy.
To check current rates, I would recommend that you check the Financial Services Authority Website, Money Made Clear here:
Chapters Financial Limited is not responsible for the content of external websites.Cash ISAs
Many will know that you can invest £5,340 in a Cash ISA in a tax year and receive interest from the investment in a tax efficient manner. This is usually worthwhile if you have not used your ISA allowance elsewhere (see below). However, it should be noted that most 'deals' are time bound and revert to a low return rate after a period of time, such as a fixed rate for 1 or 2 years.
ISA Transfers
It is possible to transfer ISA arrangements whilst keeping the tax efficient wrapper. If you are in the position, then it may well be worth taking financial planning advice to investigate alternatives and the options available.
Alternatives?
For those investors who are prepared to take greater investment risk, it is possible to consider alternative investment medians, such as a portfolio of Stocks & Shares/Unit Trust/ Open Ended Investments Companies (OEICS) designed to provide a dividend income stream. It should be noted that dividend income can be variable, being received at different times of the year.
It would not be unreasonable for a UK Equity dividend (average) return to provide approximately 2-4% pa gross.
Dividend income is taxable at 10% for basic rate taxpayers, 32.5% for higher rate taxpayers and 42.5% for additional rate taxpayers (tax year 2011/2012).
Capital Gains & Stocks and Shares ISAs
There is also the potential of the investment making capital gain. This gain can be tax efficient in using the annual capital gains tax allowance (currently £10,600). If you select this route, you could also use your ISA allowance of £10,680 (or £5,340 if you use your Cash ISA allowance in the same tax year).
Any capital gain achieved by individuals above the allowance ceiling of £10,600 is taxed at flat rates of 18% for basic rate taxpayers and 28% for higher rate taxpayers.
Seeking Financial Planning Advice
Clearly there are a lot of issues to be considered in this article and no individual advice has been provided in this text. If you wish to consider your end of tax year financial planning then please contact Keith Churchouse at Chapters Financial Limited in Guildford (Independent Financial Advisers/ IFA) on 01483 578800 or at info@chaptersfinancial.com.
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, Number 402899.
The Financial Services Authority does not regulate tax advice.
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