Today’s decision to hold interest rates comes as no surprise. While this is disappointing news for many older people who continue to see their hard earned savings disappear at a rapid rate, Saga says people will now need to concentrate on how they can make the most of their savings as they continue to suffer and be penalised by low rates. Everyone is encouraged to shop around for the best savings rates they can find.
Dr Ros Altmann, Director General, Saga said: “If interest rates were low and inflation was low, things might look okay but with low rates and soaring inflation, people are being stung by a double whammy, which continues to erode the value of their savings month after month. This is now even more pressing as we hear that NS&I will no longer offer index linked savings certificates - which were the only way that savers could properly protect their money against the ravages of inflation. If a rise in interest rates is not to happen, we need to come up with some alternative options to help people weather the storm and make the most of this bad situation.”
Saga believes firstly that it is vital for savers to shop around to find the best interest rates for their money. But there are also steps that Government could consider to help improve savers' position in the face of the ongoing discomfort created through this “double whammy of low rates and high inflation”. One such option could include providing higher ISA limits for older people.
Take an example of a typical ISA savings account paying 3.9 per cent*: for a 40 per cent taxpayer having the tax free ISA status would be the equivalent of a taxable account paying 6.5 per cent** - so this would be similar to an increase in interest rates of 2.6%. To a 20 per cent taxpayer, a 3.9 per cent ISA interest rates would give the same net income as a taxable account paying just under 4.9 per cent***. So having the tax free ISA limit increased would be the equivalent of boosting the return on a taxable savings account by 1% to 2.6%%.
Net of Tax
in interest rates
|ISA account interest rate - tax free
|Equivalent taxable account for 20 per cent taxpayer
|Equivalent taxable account for 40 per cent taxpayer
With this example, Saga illustrates that extending the ISA allowances would be like increasing interest rates for savers by between one and 2.6 per cent.
Older people trying to live on their savings or fixed annuities are struggling and there is also an increasing problem of having to pay for any care needs. Perhaps Government can consider a specific ISA allowance for care. Dr Altmann continued: “People are increasingly concerned about how to fund their care provision, and rightly so. We need to make sure people are aware, are prepared and are as protected as they possibly can be. One of the options available to combat the effects of low interest rates could be to introduce a specific ISA allowance for care so that at least any savings income will not be taxed.”
Altmann concludes: “Month after month, Saga has expressed concern for savers suffering such low interest rates which continue to erode the older generation’s hard earned savings at a rapid rate. But if this is the situation we’re currently stuck with, the authorities should help provide some good alternatives to older people to ensure they do not see their retirement nest egg, their care funds and their hard earned ‘peace of mind’ flushed away.”
Notes to editors:
• *3.9% is based on a typical 3 year fixed rate Cash ISA account.
• **(6.5 x 0.6 = 3.9)
• ***(4.9 x 0.8 = 3.92)
For further information please contact the Saga press office on 01303 771529.