Savers: good news and bad
Last year was a roller-coaster ride for investors. For savers, it was a disaster.
The Bank of England slashed base rates to half a per cent as it tried to stimulate the economy, so base rate tracker savings accounts generate virtually no income. For example, £25,000 in an account offering 6 per cent interest last year, paid nearly £30 a week. But with interest rates at 2 per cent, income falls below £10 a week, and, if your account just pays the 0.5 per cent base rate, you will receive only £2.50.
Have you checked what interest you are earning on your savings? Shop around, as companies often offer better rates to attract new customers, but leave existing accountholders with poor deals. And don’t forget to check the rates on your old cash ISAs — many are paying almost nothing.
Last year was not a good year for pensions — except perhaps for Sir Fred Goodwin. Company pension deficits grew substantially, low interest rates pushed up annuity costs and the Chancellor cut tax relief for top earners’ pensions twice. These trends may well continue into 2010.
It may be sensible to take advantage of tax breaks sooner rather than later
One change has already been announced. From April 2010, the minimum age for taking a tax-free lump sum from your pension fund will increase from 50 to 55. If you are in this age band, you need to act quickly if you want to secure your tax free lump sum early.
Pensions offer attractive tax benefits for higher rate taxpayers and abolishing top-rate tax relief or the tax-free lump sum would save many billions of pounds each year — very tempting to a future government desperate to fix the budget deficit.
So, if you can afford to, it may be sensible to take advantage of pension tax breaks sooner rather than later. Anyone buying an annuity in 2010 may find rates continue to worsen.
It is absolutely essential to shop around for the best deals and also to make sure you buy the right kind of annuity because, once you have bought, you are locked in for life.
You need to consider including your spouse, protecting your annuity income against inflation and, if you have any health issues, make sure you ask for an enhanced or impaired life annuity — which will normally give you much more.
There is one piece of good news for savers: the annual ISA allowance will increase to £10,200 for everyone from April 2010. In fact, ISAs may be an attractive alternative to pensions, especially if you are not on higher rate tax.
I expect economic growth to recover quite strongly in early 2010, which should be good for asset markets as long as interest rates remain low. However, there are big risks of a setback once rates start rising later in the year.
So, given the economic and political uncertainties, 2010 will probably be as challenging for investors as 2009. Markets should offer some great opportunities but it will not be a smooth ride. Make sure you get good advice and I wish you luck.
Dr Ros Altmann is a former government pensions adviser