With RPI running at 5.1% in April, interest rates at an all time low, personal allowances frozen and the introduction of the 50% tax band how do you get a real, above inflationary return, on your savings without taking any risk?
We have been championing the cause of savers for many months now and will continue to do so in these difficult times, we passionately want to help you get the best rate of return for your savings and believe that there has never been a time when it is more important to do so.
Inflation has steadily been on the increase during the first half of 2010 and this has made is increasingly hard for savers to get a real return on their savings. When tax is taken into account the rate of return needed is even higher, if you are a basic rate tax payer at 20% a gross return of 6.4% is needed just to keep pace with inflation, a 40% tax payer needs 8.5% and once the new 50% rate is brought in those paying the highest level of income tax need a massive 10.2% return on their savings, just to preserve their value.
How do you get a real return without taking a risk with your capital? Start by following our tips and make your savings work even harder:
Tip 1: Use Cash ISAs
To beat RPI a return of at least 5.1% is needed, unfortunately there are currently no Cash ISAs that offer a return high enough to equal.
However there are some that come close, visit our best buy tables here to see which ISAs are currently paying the best rates.
Tip 2: Use National Savings Index Linked Certificates
These really stand out head and shoulders above other options to beat inflation.
N S & I offer two versions of the Index Linked Certificates with three and five year terms.
The great things about these is that they guarantee to pay 1% above inflation and as the return is tax free they offer a great solution to the problem of inflation.
The certificates have a low minimum starting balance of just £100, unfortunately the maximum that can be held in is £15,000 in each and if they are surrendered in the first year no interest is paid.
Click here to read the Investment Sense guide to N S & I Index Linked Certificates.
Tip 3: Don’t pay tax if you don’t have to, remember the R85 form!
Many people pay tax on their savings when they don’t have to, they simply don’t realise that they can apply to have their interest paid gross and because of their level of earnings don’t have to pay tax.
If you aged under 65 and earn less than £6,475 (including interest on your savings) or are older than 65 and have income, including the State Pension and interest on your savings, of below £9,490 then you should not be paying tax on the interest that your savings generate.
To claim ‘gross interest’ i.e. for it to be paid without tax being deducted you simply need to complete an R85 for, click here for a copy, and take it to your bank or building society. They will do the rest.
It’s simple but effective and you would be amazed at the number of people who don’t do it.
Tip 4: Make sure your savings are in the right hands
If you are part of a couple, and one of you is a non taxpayer with the other paying tax then make sure savings are held in the none tax payers name. The non tax payer can then claim for interest to be paid gross via an R85 form, again, simple but effective.
The strategy can also work if one of you is a basic rate taxpayer and the other a 40% or 50% tax payer, hold the savings in the name of the 20% tax payer and at least you won’t have to pay the difference.
Remember though that you should each take out a Cash ISA to utilise your allowance for the year.
Tip 5: Shop about and fix your rate
Once you have used up your inflation beating tax free options it’s time to shop about and probably fix your rate.
Remember, if you are a basic rate tax payer you need 6.4% to beat inflation or 5.1% if you do not pay tax.
There are very few, if any accounts that offer a rate in excess of 5.1%.
If you are a non tax payer you have more options to get an inflation beating interest rate there are currently a number of accounts offering fixed rates for three and five years with interest rates above 4.4%.
Click here for more information on the accounts that offer the best rates.
Tip 6: Wait for inflation to fall
Once you have exhausted all the previous tips, or if you are a 40% or 50% tax payer, there is little you can done other than try and get a return as close to inflation as possible and then wait for the rate to fall as the Bank of England have predicted it will.
You could of course look to inject some risk into your savings and consider an equity investment to try and get a better return, this does of course come with some degree of risk which should be considered carefully and discussed with an Independent Financial Adviser.
Finally, why not take advantage of the Cash Management Service offered by Investment Sense, it’s free and really will make your money work harder for you, click here for more information.