The Bank of England (BoE) recently lowered the base rate from 5.25% in July to 5% on 1 August 2024. After 12 months of static interest rates, speculation has mounted about further potential cuts in the coming months (although this is not guaranteed). In light of the new rate, now could be a fitting time to re-examine your savings strategy for 2024-25.
Below, our Carlisle financial advisers here at Vesta Wealth offer some ideas for achieving the best savings rates, and ensuring your savings are tax-efficient. In particular, we highlight the importance of savings tax allowances to maximise your interest.
We hope these insights are helpful. Please contact us for more information or to speak with a financial adviser:
t: 01228 210 137`
e: [email protected]
Why interest rates are important
Your high street bank or building society is highly influenced by the BoE base rate. The base rate determines how much the Bank charges when it lends money to commercial banks and other financial institutions. As such, when the base rate goes up, financial institutions like retail banks typically push up their own rates – passing the costs on to customers. In theory, the opposite is also true – when the base rate falls, banks should pass down the cost savings to customers (to remain competitive).
However, this does not always happen. In the weeks following the 1 August base rate reduction, interest rates on savings remained fairly stable. However, some lenders announced reductions to some of their fixed-rate mortgage products. Long-term fixed rate mortgages are also influenced by long-term expectations of future interest rates. It can therefore be interpreted that falling rates signal future BoE cuts may already be priced into many mortgage deals.
If you have idle cash savings in a low-interest account, it is important to consider shopping around for the best deals. In August 2024, it is still possible to find deals at 5% or even more. However, with expectations of lowering interest rates, current rates may not be around for long.
One thing to be careful of is not to dive into a fixed-rate deal without carefully considering your wider financial plan. For instance, returns on fixed term savings accounts can be attractive, however they can limit access to your money. For emergency savings, these may be better placed in an easy-access account with a good interest rate.
Tax matters
Getting the best interest rate on your savings is important. However, if your interest is getting needlessly eroded by tax, then your “real” interest rate is effectively lower than the rate stated on your account(s). Here, a bit of tax planning can help you keep more of your savings.
One idea is to use a Cash ISA. Each tax year, an individual can commit up to £20,000 to their ISAs and receive tax-free interest, capital gains and dividends. It is important to plan ahead with your ISA contributions since any unused ISA allowance will be lost at the beginning of the following tax year (6 April). To mitigate this risk, it can help to spread out your ISA contributions throughout the tax year. However, this needs to be weighed against the risk that interest rates may fall further in 2024-25.
Savers also need to weigh the opportunity cost of using their ISA allowance for cash savings versus investments. Whilst a Cash ISA shields savings from tax on interest, a Stocks & Shares ISA shields investments from tax on capital gains and dividends. Investing, over the long term, will likely result in a higher rate of return compared to interest from cash.
To “free up” more ISA allowance for investment opportunities, it is generally a good idea to utilise your Personal Savings Allowance (PSA) before committing significant sums to a Cash ISA. Each tax year, a basic rate taxpayer is entitled to a £1,000 PSA; a higher rate taxpayer gets a £500 PSA.
There is also a “starting rate” for the PSA, which allows someone to earn up to £5,000 from interest if their other income is no more than £17,570. This can open up opportunities for, say, a married couple where one spouse is a higher/additional rate taxpayer, and the other spouse does not earn any income (e.g. due to childcare commitments). By focusing the household’s savings in the second person’s name, more savings interest could be shielded from tax without necessarily needing to put cash into ISAs.
Your long-term, holistic plan
Remember, the end goal of your financial plan is not to minimise tax. It is to achieve the ambitions that are dear to your heart – e.g. more financial independence, time with family, or opportunities to travel. Speak with a financial planner about how to optimise your savings for maximum interest and tax efficiency. However, keep the bigger picture in mind.
Be careful to keep your long-term goals in view, too. For instance, committing savings to a Cash ISA may seem like a good idea in the immediate term. However, how might your estate plan be affected? Remember, under current rules in 2024-25, ISAs are not automatically exempt from inheritance tax (IHT) like pension pots. If you are under the Nil Rate Band and/or you plan to use the savings in your Cash ISA relatively soon, then this may be less of an issue. However, speaking with a financial adviser can help you identify and examine these kinds of scenarios and plan accordingly.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.