FINANCIAL INDUSTRY NEWS

​National Savings & Investment Rates

National Savings & Investments (NS&I) recently announced a reduction in interest rates that will apply to their variable rate products and also to some fixed term products on maturity. Fortunately, NS&I need to provide 60 days’ notice and as a result, interest rates do not reduce until 24th November and as far as Premium Bonds are concerned, not until the December prize draw. However, the rate reduction is so dramatic, I thought it was important to alert you to this issue.

NS&I were due to reduce their rates in May 2020, but in April they put back the proposed reduction because of the pandemic. This caused NS&I to become the market leading rate provider and as a result, they are well ahead of their target on raising capital. NS&I say they must “strike a balance between the interests of savers, taxpayers and the broader financial services sector”. However, it appears they have now swung the pendulum the other way so that many of their products will become uncompetitive.

NS&I Income Bonds have been hardest hit. The rate reduces from 1.15% to a mere 0.01%.

However, other accounts have also been hit hard, with the Direct Saver Account reducing from 1% to 0.15% and the Standard Investment Account from 0.8% to 0.01%. The Premium Bonds average prize draw has not been hit as hard, reducing from 1.4% to 1%, but this does mean the chances of a £1 Bond number winning a prize has reduced from a 1-in-24,500 chance to 1-in-34,500.

The rate offered on Fixed Term products will also reduce by a similar margin for those maturing after 24th November, making these uncompetitive as well.

This is unusual for NS&I. Until now, they have always avoided the strategy most High Street banks have employed of attracting investors with competitive rates, only to drop the rate when they have reached their investment targets.

However, despite the rate drop, the benefit of NS&I is that it is still a safe haven for monies, particularly for those investors who have far more than the £85,000 afforded by the Financial Services Compensation Scheme. Savers can certainly get better rates elsewhere, but if they move their holdings, the advice is always to not exceed £85,000 per person, per financial institution. 

This may also be a good time to look more closely at your overall cash holding. In difficult times, the natural instinct is to run to a safe haven, yet these large rate reductions announced by NS&I highlight how difficult a decision it is to remain in a cash-type asset for the long term.

As a broad ballpark guide, your cash holding should consist of three elements:

  • 1
    Day to day money in a current account.
  • 2
    Three to six months’ income held in an instant access account, sometimes known as a ‘rainy day’ or a ‘contingency and emergency’ fund.
  • 3
    Cash should be held for a purpose when the future final asset value is important. For example, the payment of school fees, a car purchase or perhaps some building work.

After allowing for the above, any excess cash that is held in accounts paying a rate lower than inflation is guaranteed to be losing money in real terms. If this is the case, it is then worth considering a more suitable investment strategy for these funds to help meet longer-term objectives.

If you wish to discuss this matter in more detail, please do not hesitate to contact us.

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What does the Bank of Mum and Dad need to consider?

In the recent Summer Statement from the Chancellor, the headline initiative was the “Eat Out to Help Out” voucher scheme for August. A further and potentially more rewarding offer was the change to Stamp Duty on property purchase, which appears to be generating significant movement in the housing market. However, with house prices still beyond the reach of many people, especially the young, the Bank of Mum and Dad (or BOMAD) is often being asked to step in on a regular basis, to help adult children with their financial commitments, including a deposit for a house.

It is understandable that parents are keen to help their offspring to get a foot on the property ladder. In the current climate, especially with many high Loan to Value (LTV) mortgages being withdrawn, parental input can certainly help. However, before you hand over your hard-earned cash to your children (or even your grandchildren), there are some important issues that need to be considered. We have noted just a few of them under the following three headings:

1)  ​Banks are clamping down on this

We are aware that a few lenders are starting to ask borrowers where their deposit has come from. The general feeling is that those who have saved the deposit themselves will be better borrowers going forward. Therefore, it is important not to simply assume that a parental deposit is the easy solution.

2)  ​Is it a gift or a loan?

If you are able and willing to provide a house deposit to your offspring, will this be as a gift or a loan? Both have different taxation issues for you as the donor, and both also come with further issues. For example, if a gift is made to your child and this money is used as a deposit to purchase a house with a partner, what is the position, should the couple split up and the house be sold? You may want a say in how the rights to the property will be held, should the relationship break down at some point.

3)  ​Can you afford it?

Whilst the natural instinct is to help your children start out in life, it is important you talk to us about the implications of this, when it comes to your own financial plans. If you do decide to act as BOMAD, it’s important to make sure that this has been built into your own financial planning process. If you’re using your pension and savings to help out, you do need to consider what impact that will have on your own retirement.

There may be other concerns with providing capital to your children, including Inheritance Tax issues. As with all major financial transactions, we would also suggest that your first port of call is to talk to us. We recognise that the “Bank of Mum and Dad” is becoming a very familiar financial lending institution. However, as with all lending, it can have issues and advice is crucial to ensure everybody benefits from the support you wish to offer.

We hope you have found the above helpful. Please do not hesitate to contact us if you have any questions.

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County Financial Limited is authorised and regulated by the Financial Conduct Authority. Financial Services Register No: 145831 www.fca.org.uk/register.

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