Switch now to save your cash

By STEVE MCDOWELL
Updated:

 

ALMOST half of all deposit accounts are costing higher-rate taxpayers money and more than one in four ordinary taxpayers would be better off hitting the High Street and spending the lot, according to some startling research.

Even as many as 23% of non-taxpayers, mostly pensioners, are being punished by shrinking savings as low rates of interest rates combine with inflation and providers' greed.

One in six deposit account providers fails to offer a single account which provides a higher rate taxpayer with a positive real rate of return after tax and inflation.

The research, by Independent Financial Adviser Bates Investments, shows the shockingly low levels of interest paid by some deposit account providers, which leave 49% of higher rate and 28% of basic rate taxpayers out of pocket.

The number of savers in the UK heavily outnumbers mortgage holders, and those most dependent on deposit savings tend to be older and have already repaid their mortgages, say Bates.

It is these people who are most exposed to the underlying rate of inflation, which excludes mortgage payments rather than to the headline rate which does not.

Even though the underlying rate of inflation fell to 1.8% in May, from 2.8% in April, many institutions are still not offering interest payments high enough to prevent their tax-paying, and in some cases non-tax paying, customers losing money.

Once tax and inflation are taken into account, basic rate tax payers only need gross interest on their savings of 2.25% to break even, as they pay a flat rate of 20% tax on savings. The figure for higher-rate taxpayers, who pay an extra 20% tax, is 3%.

Thus, a higher-rate tax payer with £10,000 savings in the three worst performing accounts - the Derbyshire Cash Account, Halifax Liquid Gold, Yorkshire Bank Cashmaster, which all pay a derisory 0.1% would in real terms lose £290 over one year if rates of inflation remain the same.

Paul Ilott, senior investment adviser at Bates, says: 'We've been keeping an eye on this sector for sometime and providers seem very reluctant to move their rates, some are absolutely disgraceful.

'We suggest those higher rate taxpayers would need to move their account to a rival bank or building society in order to maintain the real value of their savings. There are plenty of better-paying accounts out there'

Among the deposit account providers that currently fail to offer a positive real rate of return for their higher rate taxpayer deposit-based customers are HSBC, First Direct, Prudential Banking, Co-operative Bank and Yorkshire Bank. The Co-operative Bank fails even to provide a non-taxpayer with a positive real rate of return after tax and inflation.

Tim Young, senior researcher at consumer watchdog Which?, said: 'We are aware of this going on and there is absolutely no excuse for institutions to pay these paltry sums. Switching accounts is very easy and our advice to people is to do just that.'

Yorkshire Bank, which until recently did not pay any interest at all for balances below £5000 on its Premium Plus Account, said it had no plans to increase the rate further. 'Our research shows are customers are moving towards instant access,' said a spokesman. Yorkshire Bank's Instant Access Account pays 2.27% on a balance of £10,000.

A spokesman for Co-operative Bank said: 'It is a very competitive market out there, with a base rate of only 4%. But we keep our rates under review and if we feel they are out of synch we'll do something about it.'

Ilott says there are options open to the cash investor to maximise their savings. Firstly and most obviously, investors should ensure they have used up their tax-free cash Isa allowance of £3000 each year. M&S Financial Services mini-cash Isa currently pays 4.5% on an investment of just £10.

Secondly, he says, 'Tax is becoming an important issue as savings rates are squeezed, so if you have a partner who is a lower-rate, or non, taxpayer - take advantage of their position. This can improve the performance of a higher-rate payer's savings by 33%.'

Thirdly, and by no means least, switch your funds into another, positive-rate account.

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