Money news, advice and predictions for savers and spenders. This week: how savers can improve their returns with a little homework.
By Jeremy Gates
Even before a London couple admitted that a £300,000 mortgage cost them monthly repayments of just 1p, many savers must have been wondering why they ever bothered to salt their spare money away.
Plunging interest rates have slashed income on savings and, as investment trust Alliance Trust points out, inflation is higher the older you are. Over-75-year-olds, a group heavily reliant on savings, currently face an annual inflation rate of 4.9%, as they read that the Government is alarmed by the spectre of deflation.
However, as I realised when opening a Nationwide 2008/9 ISA before the April 5 deadline, savers' returns improve with a little homework.
A check of previous ISAs with Nationwide BS found two, both several years old, earning a wretched 0.7%. I had hoped both were growing steadily to eventually top up my pension income.
It was pointed out to me that both could be re-invested, as two-year ISA bonds at 3%. My wife had three ISAs, also earning 0.7%, and in the next few days, will also go into a Nationwide branch for an upgrade.
With ISA income tax-free, our old ISAs might have earned about £110 a year if left alone, against the £600-plus a year they could produce in new accounts.
Over two years, if rates stay on the floor, we could be about £1,000 better off.
Michelle Slade at Moneyfacts.co.uk says my experience is a common one - as is my laziness.
"Accounts closed to new business go off the radar," she says. "We don't monitor them and nor does anyone else. Best rates are used to draw new customers.
"Halifax Liquid Gold account is a classic example: in early days, it hit a barnstorming 6%, and now it's 0.1%. Customers just don't bother to switch to better accounts."
Since September 2008, carnage on the ISA front has been bloody, says Slade.
Chesham BS slashed its cash ISA rate from 5.35% to 1%; Nationwide BS trimmed its Instant Access ISA from 4.3% to 0.50% and West Bromwich BS Easy Access ISA tumbled from 4.85% to 0.10%.
"None of these accounts made a cut after the last base rate reduction early in March, so they could fall even lower," she says.
At finance website Moneysupermarket.com, head of banking Kevin Mountford says switching Cash ISAs has been a cumbersome business for far too long.
He urges providers to follow Lloyds Banking Group - with a quarter of the ISA market - along with fellow big players Abbey and RBS Group in allowing electronic transfers to speed things up.
Mountford thinks many ISA holders might like a switch to NatWest's eISA account, paying 3.25%, if it isn't too much hassle.
It could be late-2010 before rates return to sensible levels. Until then, savers are losing serious money by failing to update old accounts.
:: This month sees the fourth anniversary of the Child Trust Fund (CTF), given to all children born on or after September 1, 2002. The Fund is likely to give the luckier ones a five-figure sum at age 18 from September 2020 onwards.
All received an initial Government voucher worth £250 and in September, the oldest recipients get another £250 on their seventh birthday. For low income households claiming full Child Tax Credit, each voucher is worth £500.
The plan is that family and friends top up the Government hand-out on a regular basis as the fund grows tax-free.
More than four million CTFs have been opened so far. Around three quarters of parents choose provider and product, while the rest do nothing - and the taxman opens an account on their child's behalf.
CTFs can be held entirely in cash, with Hanley Economic BS - a good payer among building societies - currently offering 5%, tax-free. The typical rate for a Cash ISA is around 3% and some pay barely 2%.
The most popular type of CTF is a stakeholder fund, with most of the money invested in shares and charges capped.
Non-stakeholder CTFs invest only in shares, with higher charges for more active management.
Despite recent alarms, performance tables show some equity-based CTFs performing well: over 60 months, Family Investments Ethical CTF boasts a 53.41% return, with Children's Mutual CTF just under 49%.
Over three years, best performers include Engage (27.81%); Halifax (21.13%) and Nationwide BS (19.88%).
Parents keen to tap City expertise on behalf of their toddlers can contact The Association of Investment Companies (AIC), which publishes a list of children's savings schemes and CTFs, usually with minimum lump sum and monthly contributions.
Well-regarded fund managers offering CTFs include F&C Investments, Alliance Trust and Baillie Gifford, with charges kept low to attract business. If shares do bounce strongly from current levels, CTFs held in equities could deliver impressive returns over 18 years.
CTFs are part of Mr Brown's vaunted "Savings Gateway", and could yet be his greatest achievement. Where families top up Government vouchers with the maximum £1,200 per year, their children could get £30,000-plus at 18.
If student fees rise to £7,000 per year, that money could be vital in helping a child to get a degree. Alternatively, it might enable young adults to buy a home much earlier than would otherwise be possible.
In theory, any savings account which cannot be touched for 18 years, is usually better in equities than in cash.
Around four CTFs in five are invested in shares. David White, chief executive of The Children's Mutual, the friendly society, which is a leading provider of CTFs with around 620,000 accounts, says the effect of rocky periods is ironed out over the long term.
His society opened 12,800 CTFs in February, its highest-ever monthly tally, despite the gloom surrounding shares.
White says, suppose CTFs had started in 1991, nearly half of today's 18-year-olds could be collecting lump sums of just over £9,750 during 2009, if £24 per month had been saved on their behalf, despite the 1990s recession and the bursting of the 'tech bubble' which sank shares in 2000/3.
Where families had paid in the maximum £100 per month since 1991, some payouts this year might top £37,000. In total, some £3.5bn would be going into the economy in lump sums for today's young adults.
"People accept the idea of regular savings has to be embraced again. Helping youngsters into adulthood with a lump sum will become more important than ever," White says.
Children's Mutual figures show one-in-10 grandparents pays a monthly CTF contribution, averaging £28 per month per account, worth a total £470m per year.
If parents and both sets of grandparents each pay £33 per month for the same child - £99 in total - the overall amount available at 18 could top £36,800.
"It could be that children who want to graduate debt-free and put down a deposit on their first home might need something like £60,000-65,000 in today's money," White says.
"The figure will rise as university fees rise."
Besides The Children's Mutual, leading providers of CTFs include Nationwide BS, the friendly society Family Investments, which provides the The Post Office's CTF, and engage (Homeowners Friendly Society).
Choosing the actual product for a CTF usually comes down to what intermediaries suggest, admits White.
Children's Mutual CTFs sold through Lloyds Banking Group usually opt for a Scottish Widows managed fund, while Co-Op customers pick an Ethical Fund to suit the Co-op's 'green' stance.
Smaller providers include Sheffield Mutual, the Yorkshire-based friendly society, which currently tops the performance league on 'with profits' funds in Money Management magazine. In over 10 years, it has turned a monthly saving of £25 into a lump sum of £11,935.
In theory, the more any family can add to the Government handout in a CTF the better - even a couple of thousand pounds is helpful for 18-year-olds with bills to settle.
But money invested in a CTF is locked away until that 18th birthday. Families, who might run short of cash before that milestone, might prefer to save for a child in a bank or building society account, or even a managed fund, where money can be withdrawn if desperately needed.
:: Information: www.childtrustfund.gov.uk; The Children's Mutual (0845 077 1899 and www.childrensmutual.co.uk); Association of Investment Companies (AIC) factsheet on children's savings (0800 085 8520 and www.theaic.co.uk); Sheffield Mutual (01226 741 000 and www.sheffieldmutual.com).
Poundnotes
:: What's the long-term future for building societies after the sinking of the Dunfermline cuts the number of building societies down to 50, asks Kevin Mountford at Moneysupermarket.com?
He fears surviving building societies have lost 'competitive edge' and will usually follow banks in the 'best buy' mortgage and savings deal charts.
On easy access savings accounts, for example, bank products include Alliance & Leicester (3%), Abbey Instant Access saver (3%) and Egg (2.85%), while building society best buys include Mansfield BS (3%), Yorkshire BS and Barnsley BS (both 2.75%).
:: British householders could overpay £1.3bn a year for their home insurance, says Darren Black at Confused.com, which saved an average of £185 per customer who got the website to shop around on their behalf.
Black says 44% of UK homeowners have not reviewed home insurance policies for the last five years and many could plainly get similar cover for less.
:: Small investors should not be easily lured back into shares by the apparent rally in London shares, says Philip Gibbs, who runs the highly defensive Jupiter Financial Opportunities Fund, which is sitting on heaps of cash.
"Given the twin spectres of rising unemployment and deteriorating asset values, downside risk in the stockmarkets remains uncomfortably high," he says.
:: Nationwide BS has launched two five-year bonds offering a guaranteed return for savers: both the Fixed Rate Bond and the e-Bond will pay up to 4.15% gross AER, on minimum £1 deposits.
:: High Five Savers:
Phone No Rate Account Period Deposit Interest paid
Close Brothers 0207 392 1772 4.30% Premium Gold £10,000 Two Year Bond £10,0000 Yly
West Bromwich BS www.westbrom.co.uk 4.20% E Bond 19 31/05/14 £5,000 Yly
ICICI Bank UK www.icicibank.co.uk 4.10% HiSAVE Fixed Rate 24 Month Bond £1,000 OM
Barclays Bank 0800 494 949 3.55% Golden ISA Instant £1 Mly
United National Bank 0800 218 2266 3.50% Three Month Gold Deposit Three Months £1 Half-yearly
:: Top Five Borrowers:
Phone No Rate Period Max% Adv Fee Incentive
First Direct 0845 610 0100 2.89% for term 80% £799 Yes
HSBC 0800 494 999 2.95% for term 60% £799 Yes
Market Harboro' BS 01858 412 250 2.99% for two years 75% £990 Yes
Hanley Economic BS 01782 255 000 3.14% for two years 80% £799 Yes
Market Harboro' BS 01858 412 250 3.49% for two years 75% £595 Yes
Co-Op Bank 0800 633 5286 3.64% to 31/03/12 75% £995 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice)
