Investing Insiders Weekly #14

Top Story

OF NO INTEREST: Savings rates tumble after base rate cut – see the worst offenders

The Bank of England cut its base rate to 4% earlier this month, which has been followed by a flurry of depressing savings account rate cuts.

The BoE’s base rate is used by banks to set their savings and mortgage rates. So, a rate cut is usually good news for mortgage holders and bad news for diligent savers, and vice versa for when the rate rises.

But… and not to sound sceptical… you might notice that when the base rate falls, lenders are slow to filter those reductions through to their mortgage deals, while your savings account announces it’s slashing its rates before the Bank of England’s governor has even finished his speech.

Over the past few days, we’ve recorded some hefty falls across ISA providers. CMC Invest is the worst offender we’ve found, having slashed its Cash ISA rate from 5.44% to 4.59% – a drop of almost a whole percentage point. 

Tembo is in second place, announcing a cut from 4.64% to 4.10%. It still has the top Lifetime ISA, but only if you claim the bonus offer, taking it from 4.1% to 5.1%.

💡 What should you do about it? Don’t settle if your cash ISA provider significantly slashes your rate – you may still be able to get a better deal at a competitor.

If your rate falls below 3.6% – the current rate of inflation – you are effectively losing money, as prices are rising faster than your money is growing, meaning your pound is not worth as much as it used to be.

If your savings goals are longer term and you have three to six months of savings for emergencies, you could consider investing – stocks and shares ISAs have the same tax benefits as cash ISAs, and the stock market has historically outperformed both cash and inflation.

You can check out our top picks for cash ISA providers here.

PENSIONS WATCH

State pension ‘triple lock’ looks unsustainable – boost your own retirement savings

New figures from the Department for Work and Pensions (DWP) show the number of people receiving state pension has risen to 13.1 million. That is an increase of more than 200,000 people in one YEAR.

The figures emphasise the ever-increasing challenge of sustaining the state pension triple lock – a guarantee that ensures that the state pension rises in line with the highest out of inflation, wage growth or 2.5%.

The guarantee is well-intentioned – it means payments rise in line with rising costs.

But it is extremely expensive for the government to maintain: it’s expected to cost around £15.5 billion a year by 2030.

Political parties don’t want to scrap it, because that would be unpopular with older generations. But they need to face up to the fact that it is too expensive to maintain like this with an increasingly ageing population. Reform is urgently needed to ensure there is a state pension that continues to work into the future.

However, in the meantime, there is no harm in making sure your private pension savings are in order. 

Get your pensions in order: our guide

1. If you are employed, make sure you’re enrolled in your workplace pension. You’ll benefit from contributions from your employer and get a boost from the government via ‘pension tax relief’.
2. If you are self-employed, open a personal pension and start contributing regularly. You won’t get employer contributions, but will benefit from pension tax relief (aka, free cash). Check out our top picks for personal pensions and SIPPs.
3. Track down your old pensions from past jobs to ensure you aren’t missing any cash.
4. Consider consolidating them to one pot to keep track of your savings and ensure you are getting the lowest fee. We have a free pension tracing service in partnership with Gretel you can use to trace your old pensions – you just need your name and address.
5. Increase your contributions over time if possible. If you saved £50 a month into your pension, growing at 5% a year after charges, you would accrue £76,301 over 40 years, having saved £24,000 of your own money. But if you increased your payments by 2.5% per year, you would save a total of £109,671, while only saving £40,000 of your own money.

QUICK EXPLAINER: FISCAL DRAG

What is ‘fiscal drag’? And what does it mean for you?

Fiscal drag. It’s a term that’s thrown around by finance-y people all the time – it’s also known as a ‘stealth tax’. 

In a nutshell: Fiscal drag is where taxes aren’t actually increased, but tax thresholds are frozen. 

Over time, wages rise in line with inflation so that earnings keep up with the cost of living. If tax thresholds are frozen, that means more people get dragged into either a) paying tax or b) paying a higher rate of tax, even though they’re not really any ‘better off’ (as their wages are just rising to keep up with the cost of living).

This means that you could end up paying more tax, even if taxes don’t actually rise. Millions of people have been dragged into higher tax brackets. It’s a great way for governments to make extra income from tax, without actually having to ‘increase taxes’.

The current tax bands are: No tax (up to £12,570), basic rate tax (20% on earnings up to £50,270), higher rate tax (40% on earnings between £50,271 and £125,140) and additional rate tax (45% on earnings over £125,141).

These bands have been the same for years, and will remain the same until April 2028.

What can you do about it?: One way to beat fiscal drag is to put more of your income into your pension, if you are expecting to get dragged into a higher tax bracket. 

Pension savings are either taken out of your salary before tax is calculated, known as ‘net pay’ – reducing your income for tax purposes – or, you get tax relief on your pension contributions, known as ‘relief at source’, so you are effectively refunded some tax.

You could also put more money into an ISA, which are tax-free savings vehicles. You don’t have to pay tax on anything you earn in these savings vehicles. You can currently put £20,000 in a year.

CHART OF THE WEEK

Most people won’t want to invest in a company with limited prospects of building a sustainable business… right? 

In the past, that would appear to be the case. But new data shows that investor interest in companies deemed ‘non profitable’ has increased over the past month and has outperformed higher-quality peers.

It serves as a reminder that the big names aren’t always the safest bet – but remember, past performance is not an indicator of future returns.

MASTER YOUR STUDENT FINANCES 🎓

If you’re heading off to university or starting an apprenticeship this year we’ve got a round up of top tips to help you manage your money like a pro. 

From creating a budget and finding the best discounts to avoiding pesky scams, we cover everything you need to know in our student budgeting tips guide.