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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