Weekly News Bulletin - 22/11/2021

Savings

Is your savings account taking you for a ride? Big banks cash in with £1trillion now languishing in legacy pots paying a pittance

Analysis shows that savers with the UK’s biggest banks hold £866bn in easy-access accounts which pay very little interest, with this an increase of £179bn since the start of the pandemic. Customers keep a further £250bn in current accounts which pay no interest — a rise of £59bn. The report shows that easy-access accounts with banks such as Barclays, HSBC, Lloyds, NatWest, Santander and TSB typically pay just 0.01% interest, while other providers now pay as much as 0.67%. Anna Bowes from Savings Champion says big banks “are renowned for not passing on any base rate rise in full. Even if they were to, you would still lose out because they pay such low rates.” Daily Mail

Woman pays off £8,000 debt using 'cash stuffing' - and even manages to save £7,000

A super saver has not only paid off £8,000 of debt but also stashed away a £7,000 emergency fund in just one year using a budgeting technique. The trick, known as cash stuffing, helped single mum Euphemia Moore, 38, start getting out of debt in December 2019. Cash stuffing is where budgeters rely on moving money to separate saving pots or envelopes - usually, physical cash. They might have pots for holidays, debts, groceries and so on. The technique sounds simple, but it is effective, as it means savers are more likely to be disciplined with their money, the Sun reports. This is because they are less likely to spend, say, money earmarked for debt repayments on holidays if they have to actively take it from one account in order to do so. People using the technique first work out a budget, normally for a month. They then decide how much they will spend on certain things in advance after accounting for payments like rent and bills. It is common to do this by physically putting cash in envelopes - though doing this does mean losing out on any interest gained from saving in a bank. There are digital ways to be a cash stuffer, which are safer - as it means you can't lose your money. Banks such as Monzo have a 'cash pot' function which works in much the same way, as does Starling Bank. Daily Mirror

UK inflation rise: tips to protect your investments, property, savings and pension

Inflation has already risen to 4.2 pc and is expected to climb as high as 5pc early next year, more than double the official 2pc target. Inflation is bad news for savers and those on fixed incomes, who see their purchasing power reduce in real terms. That is because everyday expenses, such as food and fuel, are rising. Investors can protect themselves by buying index-linked bonds, where interest paid rises in line with inflation. Inflation, in moderation, is not necessarily bad for stocks, as companies can pass costs onto consumers to balance out rising input costs. Companies which have strong pricing power, such as utilities or large consumer brands, should be able to carry on with business as normal. Infrastructure and real estate investments often have contracts linked to inflation, so their income and dividends would rise as inflation does. Gold could also rise in value. Supply is relatively fixed, so more money floating around the economy should increase what people are willing to pay. Inflation can have an enormous impact on how long retirement savings will last. Those with an annuity can see their income eroded every year if they have bought it at a fixed rate and will suffer the most from a sharp rise in inflation. Inflation poses a looming threat for the housing market because it will push the Bank of England to raise interest rates.Buyers would have less purchasing power when mortgages become more expensive, and this has already started with banks ditching record-low deals and upping rates. Daily Telegraph

Pensions

Pension drawdown rules: The pros and cons of taking your pension now

Withdrawing from your pension can be done in a number of ways. What is a pension drawdown, and what are the positives and negatives of using one to access your hard-earned retirement funds? A pension drawdown is when a saver takes a tax-free lump sum from their defined contribution pension, but keep the remainder of the money invested to keep an income for retirement. What are the rules of a pension drawdown? You can take up to 25 percent of your pension savings tax-free lump sum. Any subsequent withdrawals after your 25 percent tax-free lump are subject to income tax rates. Taking a pension drawdown can be good if you’re not ready to take all of your pension straight away. For example, if you’re lowering your working hours to part-time and not retiring fully. The biggest risk of drawdown is running out of money. Many savers can exhaust their savings quicker than expected. If they take income at an unsustainable rate, have insufficient growth from assets, or experience “sequence of return”. Sequence of return is when the market falls and withdrawals can limit the longevity of savings. A pensions drawdown isn’t the best option if you want a guaranteed income each year, or if you are concerned you could run out of money. Daily Express

Property

Banks target younger homeowners with Black Friday mortgage rates bonanza

Banks are offering younger borrowers cheaper mortgages while raising rates for other borrowers, with brokers saying lenders have become less cautious about taking on these borrowers. Aaron Strutt of mortgage broker Trinity Financial said: "The market tends to slow down the closer we get to Christmas, and lenders want to keep it moving, especially for first-time buyers, who are the lifeblood of the market. The best way to do that is to lower prices.” The average two-year fixed rate for borrowers with a 5% deposit has fallen by 0.08 percentage points since the start of the month, according to Moneyfacts, while the average 10% deposit mortgage fixed for two years is 0.06 percentage points lower. The Telegraph

Homeowners rush to secure cheap mortgage rates

Homeowners have raced to get ahead of expected rise in the cost of mortgages, paying thousands of pounds in penalties to leave deals early. The number of fixed-rate sub-1% mortgages has fallen by more than 85% in less than two months, according to financial analysts Moneyfacts, and mortgage brokers have reported a surge in borrowers eager to remortgage as lenders pull their lowest rates from the market. Borrowers looking to remortgage accounted for 45% of market activity in October, up from 36% in the same month in 2020, according to Mortgage Brain. And in the first week of November this increased to more than 53%. London and Country Mortgages' David Hollingworth said: "There is no question lenders pulling deals before borrower's eyes has triggered a rush to lock in lower rates." The Telegraph

Inheritance Tax

Britons could 'slash' their bill as IHT is ‘voluntary tax’ to be paid

Inheritance Tax, for many Britons, is a nuisance levy, often referred to as a “death tax” payable at 40 percent. It must be met on the value of a person’s estate at the time of their death over a certain threshold - usually £325,000. Express.co.uk spoke to Makala Green, founder of Green Wealth Planning who discussed the legal ways to alleviate oneself of a tax burden. She said: “The first and most easy step when it comes to Inheritance Tax planning is making sure that your Will is in order. “That doesn’t always necessarily reduce IHT, but it does lay out where a person wishes their assets to go, and people can benefit from that. “For example, if a person is leaving their main residence to children they can benefit from the residency nil-rate band. “Whereas if they state in their Will that they want to leave something to, for instance, a niece or a long-lost brother, that allowance won’t be permitted. Another key way to reduce an Inheritance Tax bill is to make use of simple allowances such as gifts. Green said it is worth looking into the free gifts a person can make each year and using these on a fairly regular basis. Green continued: “Another quite simple step is to ensure things like pensions and insurances are reviewed. “The pension itself is outside of the estate for IHT purposes, but it is worthwhile making sure it is going to the right person.“The proceeds of life cover also form part of the estate. A lot of people take out life cover to make sure their families are protected, but they may not receive the right advice and could be financially liable as a result. Daily Express

£50m paid in unnecessary IHT

Analysis by law firm Boodle Hatfield suggests that hundreds of taxpayers are being caught out by avoidable Inheritance Tax, with £50m in unnecessary IHT paid through gifts gone wrong last year. Geoffrey Todd of Boodle Hatfield said: “Hundreds of people are being unnecessarily caught out each year when passing assets along to the next generation.” He added: “On average, they are throwing away more than a quarter of a million pounds each by falling into an avoidable trap.” Mr Todd warned that the complexity of the IHT regime means it is very easy to make mistakes, adding: “Unfortunately, this can lead to beneficiaries facing hefty bills.” The study found that the most common issue involves parents giving the family home to their children but continuing to live there, making the property a Gift with Reservation of Benefit. Such assets are considered to remain part of the donor’s estate for IHT purposes. Daily Express