And whilst we’re on the subject of banking, Money Saving Expert Martin Lewis has reminded me its time to re-inspect all my savings accounts to make sure I’ve protected my ‘stash’ from the money grabbing Sheriff of Downing Street who is thinking of lowering the cash ISA savings threshold from £20,000 to potentially £4,000 per tax year.
If you’ve taken your eye off the ISA ball then may I suggest a visit to Martin’s web site where he’ll update you on the ins-and-outs of cash ISAs and more importantly the benefits of having your nest egg stashed in a nice little tax wrapper.
Bah! What’s it to me? Can’t be arsed with all that financial malarkey I hear you say. Well, I’m going to add my six-penneth worth here to tell you why you should be bothered.
Rachel from Accounts latest plan is to manipulate savers into propping up UK industries by making it less attractive for us to put large chunks of wonga into cash ISAs. Instead she hopes to encourage us to fritter our pensions away on the vagaries of the stock market. No doubt her fund manager cronies have all been crying into their martinis at the loss of fees to help keep their gas-guzzling Maseratis on the road which is why she’s turned her beady eye on cash ISAs.
UK savers like myself are a cautious bunch. I like my capital guaranteed and the thought of losing all that hard earned money on a turn of the stock market roulette wheel sets my heart racing. I want the bird in the hand, not the potential two birds in the bush! And I’m prepared to accept less growth to achieve this. Hope you're listening Rachel.
The Chancellor is in for a nasty shock if she thinks cash savers are suddenly going to flock into UK equities. Au contraire, mon ami. Perhaps she doesn’t read The Times or else she would have spotted this little snippet headed ‘UK Equities Shunned’. Seems like all larger, savvy investors are dumping UK equities by the handful so why then does she think smaller investors would suddenly want them? Would you buy a 3-legged horse? My thoughts exactly!
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UK equities? I'll give it a miss |
Should the cash ISA threshold be lowered from £20,000 to £4,000 in a given tax year, it would take you 5 tax years to deposit the current threshold amount of £20,000.
Assuming you opened up a new cash ISA in April (the current tax year) with the maximum amount of £20,000 and this was invested in a one-year fixed interest rate cash ISA at say 4%, at the end of the term, your investment would be worth: £20,000 + £800 interest = £20,800.
Without compounding the interest, if you fixed the £20,000 for 5 years at 4% then you’d have earned £4,000 tax free interest on your initial investment by the time savers on the lower threshold amount had reached the £20K total.
Fast forward to October’s budget. If the cash ISA threshold is lowered to £4,000 and you opened up the same one-year fixed interest rate cash ISA investing the maximum at 4% then your investment would only be worth: £4,000 + £160 interest = £4,160. That’s £640 less interest than the saver maxing out their cash ISA at the higher threshold rate.
But here’s the thing – if the maximum amount you can save into a cash ISA is only £4,000 then where would you put the remaining £16,000 if you had total capital to invest of £20,000?
Since you can only hold cash ISAs totalling the maximum threshold amount in any given tax year then it’s assumed you’d have to put the remaining £16K in another type of savings/deposit account and doing this might expose you to the savers tax if you breach the annual £1,000 interest threshold.
So, dear savers. What I’m trying to point out is that if the Sheriff of Downing Street gets her wicked way and lowers the cash ISA limit then you’ll have to decide whether to:
a) Take a punt on a stocks and shares ISA and risk your capital
b) Deposit funds in other types of non-ISA savings accounts and risk a tax penalty
c) Leave your money under the mattress ord) Blow it all on coke and hookers
Be on your guard also for any proposed changes affecting how and where your pension funds are to be invested in the future as this too could affect the value of your overall retirement nest egg.
Rumour has it that fund managers may be required to put a larger percentage of pension fund cash into UK equities, a risky business for sure judging by the number of companies going bust or unable to pay out decent dividends to investors.
Being quite close to retirement, I’ve taken that decision out of my pension fund manager’s hands by choosing the ‘Freestyle’ option of private pension where you decide what funds your cash are invested in. And guess what? To reduce volatility on my portfolio, I’ve selected Cash Funds for my pension pot. These funds won’t make me a retirement millionaire but at least at the moment they’re not losing value.
Why do cash ISA's matter? Tax. And particularly so when you retire because you'll need the most income possible without having to hand any more of it back to the Tax Man.
Finally, always seek proper financial advice before investing your money, don’t be guided by what you read in the papers or on the internet because you never know when people are talking complete bollocks.