Faced with the threat of Covid-driven recession, the Bank of England has been discussing the prospect of zero or even negative interest rates.
If the UK took this route to stimulate demand, it would be following the examples of Japan and Switzerland.
Whatever the economic case, if you’re a saver with significant cash in the bank this is likely to cause you some alarm. In fact, one client we were talking to recently is in just this situation.
Frank Daniels (client’s name changed for privacy) is retired and, apart from his pension fund, he has £10,000 in the bank. Tired of only earning 0.1% on this and worried by the prospect of getting no interest or even paying for the privilege of keeping it on deposit, Frank was contemplating drastic action. He was planning to withdraw £4,000 – the limit his home insurance would cover – and basically, keep it under his mattress.
While understanding Frank’s frustration and his reasoning, we strongly advised against this and suggested a couple of better options.
As Frank is retired and has no taxable income or earnings, he can pay £2,880 of his cash into his pension fund and receive an immediate present from HMRC in the shape of £720 of tax relief added to his pension. This alone would give him an effective 7.2% return on his £10,000. Frank can repeat this contribution into pension every year until he turns 75, or unless pension legislation changes. On withdrawal, Frank will be able to withdraw 25% of the pension tax-free, the remaining 75% will be taxable at his marginal rate.
If access to this investment is important, then he could pay it into a stocks and shares ISA, where growth earned is capital gains tax free, withdrawals are also income tax free. Alternatively, if he wants a cash position, he could invest in a Cash ISA or, National Savings and Investment product such as Premium Bonds.
Investing into stocks and shares carries risk. Your capital invested goes down as well as up and you may not get back that invested capital.
All of these are a better alternative to keeping ‘money under the mattress’ , where, not only will it earn no return, its purchasing power will be steadily eroded by inflation, which the Bank of England target to be 2% a year.
If you’re in the same situation as Frank, have a chat with us. There are a number of options available for you, for the short term or longer term and we can recommend the most appropriate, depending on your circumstances, tax status and personal plans.