Ten top tips to beat the savings crunch

Published on Saturday 7 March 2009 13:28

SAVERS arrived in Neverland when the Bank of England cut interest rates to 0.5%, pushing down returns to a 315-year low.

Those who live off the return from their savings, such as retirees, have been hit hard, having seen their regular income cut by a factor of around five compared with a year ago.

Those saving hard for retirement will also be depressed, having watched their pension funds all but expire as markets tanked again last week. Many have given up saving completely, according to a report from Nationwide, which showed that a quarter of adults are saving nothing at all.

But there are ways of putting your hard-earned cash to good use. Here are 10 ways to beat the savings crunch:

1. Lock into the best rate

You can lock into 3.75% for a year with the AA. However, the AA is covered by the HBOS deposit guarantee, so if you already have 50,000 with the group it may not be suitable. For more savings information, check our best buy tables.

2. Protect savings from tax

Always wrap your deposit savings in an Isa and the deadline is looming to make the most of this year's 3,600. With interest rates low, many investors may feel it is not worth using this year's Isa allowance, but rates will rise again, and they will be pleased they protected their earnings from the taxman.

Families should also remember children have a personal tax allowance too, which can be put to good use.

3. Pay off your debts

Settle any credit or debit card debts and consider reducing your mortgage while payments are sliding. If inflation does take hold, rates may have to go back to levels not seen for a quarter of a century.

4. Invest in your state pension

If you can afford to lock your money away take a look at your state pension. If you have gaps in your national record consider making additional contributions.

The cost of plugging those gaps to qualify for a full state pension will climb by half from April, potentially hitting hard women who wanted to "buy back" lost years spent raising a family or caring for elderly relatives.

From April, the weekly cost of buying back missing NI contributions rises from 8.10 to 12.05, pushing up the price of replacing a year's lost contributions from 421 to 626. Buying back 10 years will rise to 6,266.

For a small group of women retiring before 2010, it could represent a 7,200% return on their cash. If they act quickly they could invest 421.20 to enjoy a pension worth 30,656.

Under current rules, if you have fewer than 10 years' worth of contributions, you get no pension at all. If therefore you have nine years on your record, it will cost you only 421 to buy an extra year, qualify for something and actually get 26% of a full pension, worth 30,656 if you tried to buy it from an insurance company.

The rules are changing so that anyone retiring after 2010 only needs 30 years of contributions and credits.

However, women who retire before April 2010 must still make 39 years of contributions to achieve a full record. If you retire before 2010, each year you buy back will only restore 2.5% of your weekly pension, compared with 3.3% for women who retire after that date.

5. Boost your company pension

Consider exploiting the tax incentives to make additional contributions into your pension. Pension contributions are taken out of pre-taxed income, so they save you income tax, which is particularly valuable to higher rate taxpayers.

Furthermore, many are hopelessly under-investing in their pensions. Conventional wisdom indicates that you need to invest around 20% of salary each year to provide a decent pension. Yet most money purchase schemes only put by around 10% to 12% including employer contributions. The more you put in the more you can get out, and the tax relief will help.

Members of final salary schemes may also top up their pension. You can buy "added years", but be careful if your scheme has a big deficit. Were it to go down, and be forced into the Pension Protection Fund, you could lose out.

In this case a better option might be an investment-type additional contribution. But although these should be ring-fenced, there remains a slight danger they could be swallowed if the scheme crashed. A standalone stakeholder or self-invested personal pension might be preferred.

6. Buy forward

If you're planning big purchases such as a new kitchen, bathroom or wedding, which you are not ready to buy at the moment, ask a reputable supplier if he will give you a hefty discount for putting the money down now. But make sure the retailer is financially strong, or you could lose the lot, and always pay by credit card.

7. Pre-book school fees

Most schools will offer discounts for paying fees in advance. However, if tempted to pay for an entire education, make sure the school is right for your children and they are happy.

8. Consider an annuity

If your income in retirement has taken a battering, consider switching some of your nest egg to an annuity which pays you for the rest of your life. Since the beginning of the year the available income from annuities has fallen by 3.5%, but they continue to offer an annual return, depending on age, of about 7%. For example, a man aged 65 could exchange a 10,000 lump sum for 713 income for the rest of his life. Some of this does reflect a return to you of your nest egg.

But as Richard Priestley of Aegon explains: "This is a significantly higher return than you can earn in a savings account right now. The reason annuity rates have held up reasonably well is that they are based on long-term interest rates which are currently much higher than short and medium term ones. You can currently earn 4% to 4.5% on a 10-year gilt."

9. Loophole for the over 50s

You can take a quarter of your pension out as a lump sum over 50. Higher rate taxpayers might consider saving via a pension, thereby cutting their tax bill, and then immediately taking out the cash sum. However, the remaining 75% must either be used to buy an annuity or left in a pension drawdown scheme.

10. Consider bond, cash or guaranteed managed funds

There are a range of investments which hold out the hope of a superior return. However, most involve some risk to your money.

Distribution manager shares it around

SHAUN Millar is an enthusiastic Isa investor, but admits to playing it safe over the past couple of years.

The most recent picks by the 35-year-old distribution manager from Cumbernauld have been a couple of cautious total return Isas with J P Morgan.

"They're largely invested in fixed interest securities, and they've done OK. I'm happy with their recent performance," says bachelor Shaun. But in the past he has been considerably more adventurous, investing in China, India and smaller company funds.

"These are now back to their 2005 and 2006 levels, but I have held on to them because I view them as longer-term investments," says Shaun.

"I have a long horizon and want to see them back in profit by September 2013. And I have every confidence that they will be."

But even this isn't exciting enough for Shaun, who has just made some changes to spice up his pension.

He wanted to see it invested in more dynamic areas and switched some of his retirement savings into, among other areas, the agricultural sector.