Managing my money
Managing my money

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Managing my money

5.2.4 Why savings rates differ

Our personal finance expert Jonquil Lowe talks on Bolton FM radio (16 March 2014) about the new higher limit for ISA products following the announcement by George Osborne in his 2014 budget statement.

In the table you’ve just looked at, the five-year Fixed Rate Bond and the Notice Account both have higher net rates than the Instant Access account. The amount saved also influences the rates offered for both Instant Access and Notice accounts: the higher the savings deposited, the higher the rate.

The Internet Savings account can offer higher rates due to the lower costs of managing the account. Despite this, some people will still choose the most basic Instant Access account, mainly because it provides plenty of flexibility, with instant access using a cash card, so that money can be accessed night or day. The downside is the lower interest rate on offers.

The ISA (Individual Savings Account) is not subject to tax so all savers get the full (or gross) amount of interest. To encourage saving, the annual limit of investments in ISAs was raised to £15,000 per person from July 2014. The radio excerpt above covers this development. For the 2016/17 tax year, the annual limit is £15,240 – the same as for 2015/16.

In the March 2016 budget statement it was announced that a new ‘Lifetime ISA’ would be available from April 2017 for those aged under 40 years. These new ISAs will allow tax-free savings of up to £4,000 per annum with the government topping up balances by £1 for every £4 saved. Lifetime ISAs, which can be built up until the age of 50 years, are intended to help people save for property purchase or to help provide income in retirement. To support this development the overall ISA limit (for both ordinary and lifetime ISAs combined) will be raised to £20,000 for the 2017/18 tax year.

A new savings scheme for those on low incomes was also unveiled in March 2016 with those on in-work benefits who save £50 per month for up to 4 years getting a 50% (up to a maximum of £1200) top up from the government.

From January 2015 until May 2015, a new savings account was available to those aged 65 and over: Pensioner Bonds. These were 1-year and 3-year fixed-term bonds, offering attractive rates of interest – 2.8% p.a. gross and 4% p.a. gross, respectively. The bonds proved to be the UK’s most successful personal investment product ever with some £13 billion being invested.

Figure 4 The time period for which savings are tied up affects interest rates.

Listen to our personal finance expert Jonquil Lowe talk about savings on Bolton FM. This was first broadcast 16 March 2014 following the announcement by George Osborne in his 2014 budget statement about the new higher limit for ISA products.

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INTERVIEWER:
The other major thing, of course, was savings. What were the major changes there?
JONQUIL LOWE:
Yeah, there are quite a lot of measures there. So the first one is a new ISA. So from July this year, the ISA limit is going up to 15,000 pounds, which is quite a big jump. And what's more, you'll be able to put all of your ISA savings into cash if you want to.
At the moment you can only put half your ISA allowance into cash. So that's going to appeal to quite a lot of people. People who've already got stocks and shares ISAs will also now be given the freedom to transfer those to cash ISAs if they want to. So I suspect that's going to be quite a popular move.
We've also seen, for people over 65, there's going to be a new pensioner bong from National Savings and Investments. This won't come in until January 2015, but it looks like it's going to be a fixed-term product with a choice of one and three year terms. And the government has said it's definitely going to offer interest rates that are better than you can get from banks and building societies. So there'll be more details about that towards the end of the year. What else have we seen for savers? The starting rate band, now that's quite interesting.
The government said, the chancellor said, the starting rate band was being abolished. That's not quite true. What he's done is he's increased it to 5,000 pounds, but instead of tax at 10 percent on that 5,000 pounds, the tax is falling to 0%. So there's a kind of extra tax free allowance, if you've got savings that fall into that band. And that's quite complex. I won't go into it, but it won't affect everybody. But for people who have got savings and fairly modest incomes, that's good news.
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