How to make sure you’re a winner from Chancellor Rishi’s great cash splurge 

Personal Finance’s Sarah Bridge and Toby Walne assess the big changes to stem from last Wednesday’s Budget – and the accompanying cut in Bank Base Rate to 0.25 per cent.

HAMMER BLOW FOR SAVERS – SO SHOP AROUND FOR BEST OFFERS

Hard-pressed savers had have little to cheer about recently – and last week’s rate cut by the Bank of England has done little to change that. While the Bank’s decision to slash the Base Rate from 0.75 per cent to 0.25 per cent wasn’t out of the blue – the US had cut interest rates just days before – it still came as a hammer blow to savers.

To make matters worse, Chancellor Rishi Sunak’s decision to cut the amount of money the Government needs to raise from National Savings (NS&I) in the year ahead means the Government-owned bank will inevitably shave rates to the bone. This is even after rate cuts already announced that come in at the beginning of May.

Britain’s chancellor Rishi Sunak on Budget Day 2020. There was little solace for saves apart from Junior Isas

Rachel Springall from savings scrutineer Moneyfacts says savers need to be proactive and chase best rates. She adds: ‘Keep a close eye on the top saving rate tables as it can take up to three months for a Bank Base Rate cut to feed its way through the market. If savers want a secure rate for the next year or more, then a fixed rate bond could be a great choice.’

The best deal on a one-year fixed rate bond is 1.6 per cent, from My Community Bank. It pays 1.8 per cent over two years and 1.9 per cent for three years. For easy access to cash, Virgin Money is offering 1.31 per cent.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, says shopping around is key. She adds: ‘You don’t have to settle for the miserable rates from the high street banking giants. You can get significantly better rates with newer banks and some building societies.’

MAKE THE MOST OF THE NEW CHILDREN’S LIMIT 

Wednesday’s Budget saw the annual maximum savings limit for Junior Isas – tax-free savings accounts for the under-18s known as Jisas – more than double, from £4,368 to £9,000. An unexpected move welcomed by commentators – and rightly so. 

Saving on behalf of children needs to be encouraged.

Investments or cash held in an Jisa is locked up until a child reaches 18, at which point it converts into an adult Isa and is accessible – to be used, for example, towards buying a house.

With the new annual Jisa allowance working out at £750 a month, it is unlikely that most parents will be able to put in the maximum allowed. But well-off grandparents can also contribute.

Laura Suter, personal finance analyst at AJ Bell, says: ‘The increase to the allowance has supersized the amount parents and grandparents can put away before a child’s 18th birthday.

‘In reality though, it is only going to be of interest to a small proportion of the population.

‘If you assume a typical two-parent, two-child family and add together all the available Isa limits a family would have from next month, they would need £58,000 of spare cash to max out all the allowances – that’s out of the realm of possibility.’

Sunak’s clear message, though, is that he wants to encourage saving from an early age. Hurrah.

Britain's Chancellor of the Exchequer Rishi Sunak meets with the Governor of the Bank of England Mark Carney at Downing Street

Britain’s Chancellor of the Exchequer Rishi Sunak meets with the Governor of the Bank of England Mark Carney at Downing Street

DON’T FALL INTO PENSIONS TAX TRAP

Although some feared Sunak might scale back the 40 per cent tax relief that higher rate taxpayers get on the contributions they make into their pensions, he did what previous Chancellors have done: he held off, fearing a backlash from Middle England. Hurrah.

Yet he did take time out from helping small businesses – absolutely the right thing to do – to ensure most high earners (doctors in particular) will no longer receive unexpected tax bills due to unintentionally exceeding limits on the amount they save into a pension. Hurrah again.

Limits introduced cack-handedly by George Osborne in 2016 have seen some doctors and consultants reduce their hours or even retire early so as to avoid the tax trap. The result is that come the new tax year, fewer high earners will see their annual pension allowance – the amount they and their employer can put into a pension every year that qualifies for tax relief – scaled back drastically from £40,000 to a minimum £10,000. The exact cut depends upon their earnings.

It is believed some 98 per cent of consultants and 96 per cent of GPs now caught out by the savage tapering of this allowance will no longer be impacted in the new tax year.

For example, someone who earns £150,000 and contributes £20,000 into their pension – with the same amount paid in by their employer – falls foul of the tapering rule. Their annual pension allowance is actually £30,000 which means the £10,000 over pension contribution is taxed as if it were income – meaning a tax bill of £4,500. 

From April 6, the same person earning the same amount will be eligible to use the maximum £40,000 pension allowance, resulting in no tax charge. Only those earning more than £200,000 are likely to face stiff curbs on how much they can contribute into a pension.

Tom Selby, senior analyst at wealth manager AJ Bell, says the changes made by Sunak are ‘necessary and welcome’, but adds: ‘It is disappointing the Government has decided against scrapping this hideously complicated part of the pension tax system altogether.’

SEIZE THE CHANCE TO CUT MORTGAGE COSTS

Homeowners should look to cut mortgage costs in light of the Bank of England’s interest rate cut.

Nick Morrey, of mortgage adviser John Charcol, says: ‘Mortgage lenders have been expecting a rate cut from the Bank for months and have already priced it into their products. But if your current mortgage deal is coming to the end in the next few months I would recommend remortgaging to a low-cost deal.’

While a few lenders have already grabbed the headlines for passing on the full rate cut to borrowers on variable rate home loans – the likes of Nationwide, Lloyds and Barclays – others are unlikely to be as aggressive. According to David Hollingworth, from L&C Mortgages, a borrower with a 25-year, £150,000 repayment mortgage priced at 5 per cent is paying £876.89 a month. A cut to 4.5 per cent would see payments fall to £833.75.

But far greater savings can be made by shopping around. For example, Nationwide offers a five- year fixed rate at 1.44 per cent. Switching the £150,000 mortgage to this deal would see monthly payments drop to just £595.69. Its deal comes with a hefty £999 fee – and is only available to those where the loan represents a maximum 60 per cent of the home’s value.

Fixed rates remain the most popular type of mortgage deal. Adds Morrey: ‘Rates are so low that locking into them for several years is very appealing.’

Even if your mortgage is not up for renewal immediately, Morrey says you can get a remortgage offer now that is valid for six months. In that time you can still shop around.

SEEK A ZERO-INTEREST CREDIT CARD DEAL

THE Bank of England’s decision to cut the Base Rate from 0.75 per cent to 0.25 per cent will at some stage result in lower interest charges on debt built up on credit cards. But experts believe card borrowers should use last week’s cut in Base Rate as a trigger to seek out an interest-free deal.

Andrew Hagger, of financial scrutineer MoneyComms, says: ‘Too many people remain loyal to their credit card provider and pay over the odds. It is time to take control. Just a few minutes applying online and transferring debt to a zero per cent card could save you thousands of pounds in interest charges.’

A typical credit card user with a £3,000 balance paying 20.9 per cent interest and making a minimum payment of £90 would only see £38 of that going to reduce their debt. Making the same payment every month, it would take more than 21 years to clear the card debt.

If instead they transferred the debt to a Sainsbury’s Bank credit card, offering zero per cent interest on the debt for 29 months, they would pay a one-off balance transfer fee of 2.74 per cent (£82.20).

Monthly repayments of £106.28 would wipe out the debt before the zero rate expired. Virgin Money also offers 29 months of zero interest on balance transfers although the transfer fee is 3 per cent. But unlike Sainsbury’s which can restrict the interest-free period depending on your credit rating, Virgin Money will give the full 29 months to all those it accepts.

NatWest customers can also apply for a no-fee balance transfer card which offers zero per cent interest for 20 months.

A WIN FOR THE KEEP OUR CASH CAMPAIGN

In a major victory for this newspaper’s Keep Our Cash campaign, the Chancellor announced that he would soon introduce laws to ensure the survival of hard cash.

Although Sunak was scant on detail, he said he would ‘bring forward legislation to protect access to cash and ensure that the UK’s cash infrastructure is sustainable in the long term’.

The announcement is a boost to the 8 million people who rely on cash rather than credit and debit cards for their day-to-day spending. It should ensure banknotes and coins continue to be offered by banks and accepted by shops for the foreseeable future.

Bank industry body UK Finance believes only 9 per cent of all payments will be cash-based by 2028 – and at the present rate of bank and ATM closures, cash could become obsolete in 15 years.

The measures expected to be rolled out are likely to include a free cashback service at local pubs and shops – to be paid for by the banking industry – and support for shared bank branches.

The Government has already pledged support to keep the 11,500-strong post office network open – handing out cash at the till and its cash machines.

Natalie Ceeney, author of last year’s independent Access to Cash Review, says: ‘It is a social service ensuring access to cash is available for everyone.

‘Making it a legal obligation means concepts such as shared bank branches will be seriously considered when there is a threat to a community, such as the last bank in town closing.’

In the past two years, 9,000 cash machines have been shut and more than 6,000 bank branches have disappeared from our high streets.

HOPES FOR AN END TO RIP-OFF FUNERAL DEALS

A crackdown on the funeral industry is expected to be announced next month – with a new Government-backed price comparison website proposed, detailing individual funeral directors’ charges. A cap on the fees they levy is also expected.

The Chancellor said the Government would ‘legislate to bring funeral plan providers within the remit of the Financial Conduct Authority’. The City regulator will then be tasked with tackling widespread overcharging.

Major chains, such as Dignity and Co-operative Funeral Care, which run more than 800 and 1,000 parlours respectively, could be particularly vulnerable to the changes – to be rolled out in the autumn.

The Competition & Markets Authority launched a probe into the £2 billion-a-year industry a year ago after discovering you can save more than £1,000 by shopping around for a funeral. Yet only a minority of mourners – 4 per cent – search for the best deal.

Ian Strang is co-founder of website Beyond, which details costs of 1,200 directors nationwide.

He says: ‘Although it is a step in the right direction to target rip-off funeral deals, the measures do not stop the rot. Directors are still able to sell rubbish funeral packages that many customers do not want.’

The average cost of a funeral went up £200 last year and now stands at £4,400. But it is possible to buy a basic cremation for as little as £1,200.

 

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