Tax & Inflation RiskWritten on July 13, 2016 by Kirk Rice LLP
The Question:
We have various Savings Accounts and the level of interest we receive seems to be getting lower and lower despite shopping around. Is there anything you can suggest that could do better?
Kirk Rice LLP answers:
You could currently expect an Interest Rate of about 1.50%* from a good Savings Account.This will be Tax Free if it is in a Cash ISA or if the interest paid is within your Personal Savings Allowance (£1,000 for Basic Rate Tax Payers, £500 for Higher Rate).If not the Net Return would actually be 1.20%pa for a Basic Rate Tax Payer and 0.90%pa for a Higher Rate. Inflation, which as of April 2016 was 1.30%* will also have a bearing.The combination of tax (if applicable) and inflation mean the real value of your savings is reducing. A deposit of £10,000 after 5 years would have increased to £10,618 assuming a Net Interest of 1.20% and to £10,460 assuming a Net Interest of 0.90%. If we now adjust for inflation the real value i.e. equivalent value in today’s terms, would be £9,950 for a Basic Rate Tax Payer and £9,802 for a Higher Rate Tax Payer.
You could do better by allocating some of your savings to alternative deposit based products or even investments if you are prepared to accept an element of risk. An alternative deposit based product to consider is a Structured Deposit which typically has a fixed term of 6 years, although some do have the potential to mature earlier. They are covered by the Financial Services Compensation Scheme (FSCS). However, unlike a traditional deposit account, you will not usually have access to your capital and if you do there is a risk that if you surrender early the value could be lower than the amount deposited. The return you could expect will be defined at the outset and it’s being paid will generally be dependent on the performance of an Index such as the FTSE 100 Index. If the Index is higher at maturity or a specified earlier date in some instances, the promised return is paid along with the original deposit. But if the Index has fallen you will only get back your original deposit which of course will have had its real value reduced by inflation.
Alternatively, you could consider investing some of your money, which means you must be prepared to consider Investment Risk and Capital Volatility. Finally from a tax perspective do not forget to utilise your ISA allowance so the interest is paid Tax Free. Please get further advice and understand fully the products available and risks before allocating money to one.*Source; Moneyfacts Issue 332 June 2016.
Any reader interested in discussing this topic further can telephone Peter Sharratt on 01344 875000 or email peter.sharratt@kirkrice.co.uk
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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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