How to Beat UK Savings Crisis with Child Junior Cash ISA, Pension's and Life-time ISA
Personal_Finance / Savings Accounts Nov 27, 2016 - 05:43 AM GMTBy: Nadeem_Walayat
Britain's spanking new Chancellor, Philip Hammond recently threw some scraps at Britain's hard pressed savers with his 2.2% savings bond due to go live early 2017 by which time the CPI Inflation will be nudging 3% and RPI 4%, which illustrates its just a smoke and mirrors exercise, and even then will be limited to a measly £3k investment fixed for 3 years.
UK inflation is set to soar as I covered in my earlier analysis. And so the chancellors announcement does nothing to prevent the inevitable stealth theft of purchasing power of peoples hard earned savings and wages.
04 Jul 2016 - BrExit Implications for UK Economy, Interest Rates, Bonds, Markets, Debt & Deficit, Inflation...
Therefore both of these factors look set to drive UK CPI inflation significantly higher to above CPI 2% and very probably to spike above 3% early 2017, and RPI probably spiking above 4%. However, beyond that unless the surge in inflation triggers significant wage inflation then CPI inflation should then soon start retreat to back below 2% and the trend towards that of the inflation rate of the US at that time a year from now.
So the bottom line is that despite brexit inducing economic weakness, expect UK CPI Inflation to spike towards 3% and RPI to above 4% by early 2017, probably peaking for January 2017 data before trending lower into mid 2017
For more on the prospects for post Brexit Britain see my in depth pieces of analysis that are likely to increasingly become manifest.
UK Savings Interest Rates Collapse
My tracking of the Halifax Cash ISA's best illustrates the relentless collapse in UK savings interest rates. Firstly, the Halifax recently withdrew virtually all of their fixed rate accounts. However, to continue with this long standing series for when longer duration fixed rates return, I have applied the percentage change on the 1 year fixed rate to fixes for preceding longer duration terms (in red) to illustrate what has happened to the UK savings market.
| Halifax ISA's | May 2012 | Sept 2012 | Nov 2012 | Mar 2013 | May 2013 | July 2013 | Mar 2014 | June 2014 | Mar 2015 | April 2016 | Aug 2016 | Nov 2016 | % Cut |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Instant Access | 3% |
2.75% |
2.35% |
1.75% |
1.35% | 1.35% | 1.5% | 1.30% | 1.05% | 0.60% | 0.40% | 0.35% | -88% |
| 1 Year Fix | 2.25% |
2.05% |
2.05% |
1.75% | 1.75% | 1.65% | 1.5% | 1.40% | 0.90% | 0.65% | -71% | ||
| 2 Year Fix | 4.00% |
3.25% |
2.25% |
2.5% |
2.10% | 2.10% | 2.05% | 1.8% | 1.65% | 1.25% | 1.06% | 0.75% | -81% |
| 3 Year Fix | 4.25% |
3.75% |
2.35% |
3.00% |
2.25% | 2.25% | 2.25% | 2% | 1.75% | 1.125 | 0.80% | -81% | |
| 4 Year Fix | 4.35% |
3.80% |
2.40% |
3.05% |
2.30% | 2.30% | 2.40% | 2.10% | 1.85% | 1.19% | 0.86% | -80% | |
| 5 Year Fix | 4.50% |
4.15% |
2.60% |
3.10% |
2.35% | 2.35% | 2.5% | 2.20% | 2.00% | 2.00% | 1.28% | 0.92% | -80% |
That's right a 80%+ collapse in savings rates!
So what can savers do ?
Of course followers of my articles and videos will know that in our post financial crisis world the best place to be park ones capital for the long-run is in stock and property markets. Apparently both of which were expected to CRASH post BrExit by most of the clueless financial media. Instead have resumed their respective bull markets.
For stock and housing capital investments see -
So what to do if savers are determined to retain a sizeable rainy day cash savings fund?
Well that depends on ones age and family circumstance, for instance -
1. Do you have children?
2. Are you under 40 ?
3. How close are you to 55 years of age or already beyond?
Child / Junior Cash ISA's
Whilst one will be very lucky to find a cash ISA account that pays more than 2% today, i.e. the best I can see out there is 1.45% for a 5 year fix! That's right! FIVE YEARS! In my opinion any savings account that pays less than RPI amounts to stealth THEFT, and with RPI currently at 2% that means every savings account being sold today guarantees the theft of the value of ones savings!
However there is a glimmer of hope for people with children, in fact children under the age of 18 can be utilised to park long-term savings with tax free! AND the rates typically can be near double the adult rate! For instance the current best rate is with the Coventry ISA that pays 3.25% per year!
Key points are that there is a deposit limit of £4,080 per tax year and the funds cannot be accessed until the child turns 18. Oh and the money belongs to child, so you have to factor in whether ones sweet 13 year old will become a rebellious 18 year old and decide to blow the money on a fast car or worse drugs!
Life Time ISA's (LISA)
LISA's are George Osborne's (remember him?) March 2016 bribe to savers / cash give away that goes live in April 2017. Unfortunately only available to the UNDER 40's! For every £4k (max) deposited each year the government will top the LISA up with a £1k bonus or 25%. That's potential free money from the government of £32k! from Age 18 to 50. WITH interest on top! Albeit today's interest rates of 1% are rubbish.
However there is a catch. The money can either only be used to buy ones first home, OR be locked in until Age 60! So it really is a long-term inflexible savings vehicle. But in my opinion very much worth it as part of a savings portfolio!
There is also the Help to Buy ISA, but that only results in a maximum bonus of £3k. However you could have BOTH a HTB and LISA but you can only utilise ONE to buy your first home, which means the HTB and thus would be locked into the LISA until age 60. However you can transfer EXISTING HTB's into a LISA from April 2017.
Pension Contributions
And finally if your nearing the minimum age for drawing down on private pension pension at age 55 such as the SIPPs. Then you could look to top up your pension fund and the tax man will ADD to it at your highest tax rate!
For everyone, no matter whether one pays any tax or even works the minimum top up is 20% i.e. for a £1k contribution one would deposit £800 and the tax man will top it up with £200, that's a 25% instant return on ones deposit!
Whilst a 40% tax payer for a £1k contribution would only need to deposit £600, with the tax man topping up with £400, thus an instant 66% return on ones deposit.
Of course the money is taxable when drawn, and would need to be invested of which the safest asset class would be short-dated bonds.
So there you have 3 methods towards alleviating Britain's savings crisis. All of which need careful thought before entering into and are best part of an overall portfolio of long-term savings strategy so as to retain flexibility whilst maximising return on ones capital.
Personally I utilise child ISA's and pensions contributions to help beat the UK savings crisis. Unfortunately I am not eligible for the LISA when it goes live, else that too would form part of my savings portfolio.
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By Nadeem Walayat
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Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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