Over 600 cash deals now beat inflation – but is this a false dawn for savers?

Over 600 cash deals now beat inflation – but is this a false dawn for savers?

UK inflation falls to four-year low

Brean Horne
Wed, 05/20/2020 – 11:12

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More than 600 savings deals now beat inflation, now 0.8%, but experts say savers should not be optimistic about this lasting.

The latest figures from the Office for National Statistics (ONS) show the Consumer Price Index (CPI) measure of inflation was 0.8% in April, down from 1.5% in March.

Currently, 654 savings accounts match or beat inflation. This includes 32 easy access accounts, 61 notice accounts and 96 fixed rate Isas, according to the latest data from Savings Champion.

This outpaces 613 accounts which do not beat April’s rate of inflation. 

Is this good news for savers?

Lower CPI is good news for savers, as it means they have a higher chance of picking a deal with an interest rate that beats inflation.

This matters because inflation is the increase in the cost of goods and services, so cash held in below-inflation deals effectively loses spending power over time.

But while today’s news may appear to be good news for savers, the inflation drop may only provide a temporary boost for their cash. 

The 0.8% inflation figure is artificially low as a result of reduced consumer spending due to the coronavirus outbreak. When the pandemic subsides, chances are inflation will rise again.

Kevin Brown, savings specialist at Scottish Friendly, says:”The low inflation figures are a false signal for savers.

“It will mean more people now have inflation-beating rates of return on their savings, however treating this situation as the new normal is not the best course of action as it may only be temporary.

“The crisis will pass and the economy will open back up. This could quite conceivably lead to a spike in inflation as many households with pent up cash are unleashed on the high street.” 

Why did inflation fall?

A drop in petrol and diesel prices, along with lower energy bills were the main causes of the decrease in CPI inflation.

Average petrol prices fell by 10.4p per litre between March and April 2020, which is the largest monthly fall since 1990.

Similarly, the cost of energy for a typical standard variable tariff is predicted to fall by 1% this year as a result of the wholesale cost of energy falling.

Jonathan Athow, deputy national statistician at the ONS, says: “Falling petrol and diesel prices, combined with changes to the domestic energy price cap were the main reasons for lower inflation in April.”

Which prices went up?

The cost of goods such as video games, consoles, board games and toys rose over this period, which the ONS attributes to people spending more time at home due to the coronavirus lockdown.

Despite the overall cost of food falling 0.1%, the price of fresh vegetables including potatoes, carrots and onions rose from March to April as well.

Which are the best inflation-busting deals?

The best easy access savings deal is NS&I Income Bonds, which pays 1.16%. 

This is followed closely by Family Building Society Market Saving Tracker which offers 1.13%.

The number of savings deals has dwindled steadily since the beginning of March this year.

Savers are being advised to regularly check best buy tables and snap up good savings deals before they disappear. 

Anna Bowes, co-founder of Savings Champion says: “As expected with such a big drop in inflation, even though savings rates are being cut, there are still many more accounts that match or beat inflation at the moment.

“However, this situation could change going forward, so it’s really important to make sure that your cash is in the best paying accounts that you can find to mitigate the effects of inflation as much as possible.”

For more information about the best offers check out our guide on the best savings deals this week.

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Ex-pensions minister warns retirees could be over-taxed during lockdown

Ex-pensions minister warns retirees could be over-taxed during lockdown

There are fears savers could end up paying double tax to access their pots during the coronavirus outbreak

Stephen Little
Wed, 05/20/2020 – 11:04

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Savers could end up paying tax twice if they dip into their pension pots due to the coronavirus pandemic.

Research by pensions consultancy LCP suggests that this ’over-taxation’ is likely to get more severe during the current crisis as savers look to withdraw lump sums.

Since the introduction of pension freedoms in 2015, people aged 55 or over with defined contribution pensions have been able to take money flexibly from their retirement pot rather than use it to buy a regular income. 

Around a third of a million people took money out of their pension in this way in the first quarter of 2020, according to statistics from HM Revenue and Customs (HMRC).

Over-taxation is unlikely to be a problem for people making modest withdrawals on a regular basis.

But for those taking a one-off sum from a pension pot the excess tax could run into thousands of pounds.

This is because when HMRC taxes savers it assumes they are going to make repeated withdrawals rather than just one.

When a pension pot is all taken out in one go the first 25% is usually tax free but the balance is subject to income tax. However, HMRC requires an emergency tax code for this type of pension withdrawal which effectively taxes people upfront.

Steve Webb, partner at LCP, says “It is already unacceptable that HMRC routinely over-taxes thousands of people on one-off withdrawals from their pension pots, leaving them to fill in forms to claw back the excess tax that they have paid.

“But in the current crisis, this system will be even more penal. Lots of people who lose their jobs or suffer wage cuts will have reduced taxable income in 2020/21.  As a result, they should be paying less tax on these withdrawals.”

Scale of the problem

LCP gives an example of a saver cashing out a pension pot of £40,000. Of the total, £10,000 can be taken tax-free, and the balance of £30,000 is taxable.

A basic rate taxpayer should be taxed at 20% and pay a £6,000 tax charge.

However, the pension scheme would currently deduct almost £12,000 in tax – around double the correct amount.

The extent of over-taxation will depend on how much other income you have during the course of the financial year.

The less you have in other taxable income, the more you are being over-taxed on your withdrawal.

Table to show extent of over-taxation

Other taxable income during 2020/21

Actual tax deducted on pension withdrawal (£40k pot of which £30k taxable)

Correct tax on pension withdrawal

Refund due

£12,500

£11,781

£6,000

£5,781

£25,000

£11,781

£7,000

£4,781

£50,000

£11,781

£12,000

[-£219]

Source: LCP May 2020

Can you claim the money back?

Fortunately for pension savers the excess money paid in tax can be claimed back.

HMRC has had to repay more than £600 million in over-paid tax on pension withdrawals since 2015. 

In the first three months of this year HMRC processed over 10,000 claims from people who had reclaimed the overpaid tax as soon as it was deducted, getting back over £3,000 each on average.

Time for change

Webb says the tax system needs to change so that pension savers are penalised for dipping in their pots.

He says: “Whilst it is far from ideal if individuals feel they have no choice but to access their pensions to support them through the current crisis, the very least the authorities should do is allow fairer tax deductions upfront on them.

“The system of ‘emergency tax’ on one-off withdrawals from pension pots has already been widely criticised and it now looks unfit for purpose in the current crisis. HMRC should think again as a matter of urgency.”

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New energy deals fall to lowest prices since summer 2018

New energy deals fall to lowest prices since summer 2018

Demand for energy plummets during coronavirus lockdown

Brean Horne
Tue, 05/19/2020 – 11:57

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Household energy deals have fallen to their cheapest rate since summer 2018, according to new data from Uswitch.

This is because the cost of energy to suppliers has fallen, and this saving has been passed on to consumers who take out new deals.

The cost of wholesale electricity in April 2020 dropped 44% compared to the same time last year, with prices falling from £43.55MWh to £24.18.

This decrease was triggered by a decrease in global demand for energy during the lockdown, Uswitch found.

Households could save hundreds of pounds by switching to a cheaper deal.

Will Owen, energy expert at Uswitch.com, says: “Life is far from easy at the moment, but one small chink of light is that energy prices are lower now than they have been for almost two years.

“This will be particularly welcome news for any homes consuming more power than usual due to the lockdown.”

Where can you find the cheapest deals?

Currently the Fix’D 20 11.0 tariff from Outfox the Market is the best on the market, costing just £764, and is set for 12 months.

This is closely followed by the Green Super Power (1 Year) v4 + Free Boiler Service from Tonik Energy which costs £770.98 for 12 months.

The cheapest tariff from the Big Six is the British Gas Energy and Home Services May 2021 deal, costing £806.

The table below shows the top energy deals available right now.

Supplier Plan name End date Average price (£)
Outfox the Market Fix’D 20 11.0 12m £764.10
Tonik Energy Green Super Power (1 Year) v4 + Free Boiler Service 12m £770.98
Avro Energy Simple and SuperFixed 12m £792.85
Together Energy Green Together Fixed May21 12m £797.73
Green Network Energy GNE Spring Sunrise V4 12m £798.62
Green CherryBlossom N/A £800.09
Igloo Energy IGLOO PIONEER N/A £805.06
British Gas Energy and Home Services May 2021 2021-05-31 £806.31
npower Select Exclusive 12 Month Fix v2 12m £806.73
Yorkshire Energy Green Flamborough – Fixed until 31st July 2021 2021-07-31 £811.19

Source: Uswitch 2020

How to find the best energy deal

It is important to shop around before switching energy provider. Price comparison websites are a great place to start when shopping around.

They allow you to search through hundreds of deals from different companies quickly and easily.

You will need to have a recent energy bill or annual statement to hand which contains details about your current energy plan.

If you do not have a recent energy bill, contact your current provider to get one.

As well as looking at price, be sure to check how their customer service is rated to ensure that you get the right assistance if you have a query.

When you have found the right deal, your new provider will arrange the switch for you.

Most energy companies have signed up to the ‘Energy Switch Guarantee’ which means that it should not take more than 21 days to complete your switch.

From 1 May 2020, suppliers who take longer than 15 working days to make the switch will have to give you an automatic £30 compensation payment.

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One-year bond rates fall below 1% for first time in three years

One-year bond rates fall below 1% for first time in three years

Savers are being advised to lock in before they drop further

Stephen Little
Tue, 05/19/2020 – 11:44

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Rates for savers looking to put their money away for up to a year have now fallen below 1% for the first time in three years.

The average rate on one-year fixed bonds is now 0.99%, the lowest since May 2017, when it was 0.98%.

This means that since March the average one-year fixed bond rate has fallen by 0.16% percentage points.

Cash Isa savers have been hit even harder, with one-year Isa rates falling to 0.91%, a level not seen since June 2017.

Moneyfacts says that the current number of savings products for sale overall is the lowest since February 2017.

The total number of savings accounts, including Isas, now stands at 1,548, down from 1,768 in March 2020.

Rachel Springall, personal finance expert at Moneyfacts, says: “As we had seen last month, savings providers pulled the most deals on a month-on-month basis since our electronic records began in 2007 and while the number of products to disappear month-on-month between April and May is less, deals are still disappearing.

“Those savers who are about to come to the end of their fixed bond may wish to prepare themselves for a shock, as they will find the top rates have dropped substantially over the years.”

Why are rates falling?

On 19 March, the Bank of England cut the base rate for the second time in nine days to a record low of 0.1%.

This was done to help support the economy amid concerns about the coronavirus pandemic.

When this happens banks usually pass the base rate cuts to their saving deals in full.

While fixed-term savings deals initially remained competitive, savers are now beginning to feel the impact of the base rate cut.

Also, the coronavirus lockdown means many households are spending less and are looking for somewhere to save their cash.

As a result, many smaller providers are unable to cope with the increased demand and have had to withdraw products from the savings market.

Springall says: “Providers are perhaps cutting rates to deter deposits due to demand or find they are much higher up the rate tables than they can cope with.” 

Best one-year fixed rate

The best one-year fixed bond rate currently on offer is from Raisin at 1.43%. You can open this account online with a deposit of £1,000.

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