How time flies. It’s nearly the end of the third quarter of 2020, the virus is still enjoying our hospitality – even if our hospitality sector is definitely not enjoying the virus! -, we have passed the equinox and it’s time for that good old tradition every financially literate person follows: drawing up the quarterly figures of the financial position, having an overview of what we own and what we owe and how we could make the most of our situation. 

It is in this last respect that the idea of boxes and related thinking and perspectives has struck me. It is far too easy to accept that ‘this is how things are or have been’,  'we have always done this one way or another' and, in the process, become blind-sided to other ways and perspectives that might actually offer better outcomes for us. Specifically, on this occasion, I would like to focus on maximising income from savings, as that is generally a very good idea but, under the current circumstances, the combined effect of economic uncertainty and historically low savings rates make it even more paramount that we think before we sheepishly follow the path of the past. 

Making an effort in reviewing and deciding where to put savings and whether to fix them - and for how long - has a lot of value beyond the obvious advantage that you would most likely place your savings with the provider that offers a rate at or near the top of comparison tables. The major benefit is that you are making a conscious decision. This decision would take into consideration your future needs and ability to lock-away some of your money for some time. Just going through this mentally, you are mapping out your life, your expected income and costs and deciding what you can put away in a savings pot. This is a highly positive act, as it makes you think about ‘must haves’ and ‘nice to haves’. You are also becoming purposeful in saving for a reason or occasion and, finally, you could see it as rewarding your future self by putting money by for them.

If you have some savings already and these are fixed for a term, say a year, then you would be receiving an offer from your provider near the maturity date, showing you what they offer if you were to roll over your funds. I have had one these recently and - even though I am fully aware of the current rates - I was really shocked to see just how low the rate was. As it was a Cash ISA account (UK readers should be familiar with this; to my global audience I apologise for the jargon, just get in touch and I can explain:-)), my initial thought was: ‘Well, it’s a tax-efficient way of saving, it has been this way for quite a while, so what can I do but a Gallic shrug of the shoulders and humbly accept my low-rate fate.’

On second thoughts, however, and having found my way out of the box, I was wondering whether there was another way of looking at this. You won’t be surprised that there was. Important though the Cash ISA treatment is, it’s only one aspect of a complex set of rules that our beloved government keeps changing. As the topic of tax, finance and allowances either elicit a big yawn or strike fear into ordinary humans, not everyone is following these rules, let alone think about how they could benefit from them (if you are one of these people, this is where you get in touch and ask me to bore, sorry, help you with this). The fact is that the UK has introduced a variety of allowances regarding tax on interest income, you can check it for yourself here: 

Assuming people pay taxes – as I do – I shall focus on the effect of the Personal Savings Allowance. For basic rate taxpayers, this allows the tax-free receipt of £1,000 per year and for higher rate taxpayers £500. Now, you don’t have to be a genius, only a little bit curious and unconventional in your thinking to wonder, what does £1,000 in interest income represent in the current environment? Well, assuming 1% interest on a savings account – which is achievable but not always without shopping around – you would need £100,000 in your savings. That is a lot of money and, because you are financially literate, you also know that you shouldn’t open such an account, as it takes you over the Financial Services Compensation Scheme limit of £85,000 that protects your deposits, so you would need to split your accounts between providers. 

The main point, however, for anyone with Cash ISA accounts and less than £100,000 in savings, is that the comparison table should include not only Cash ISA but, also, non-ISA accounts, because the Personal Allowance provides the same tax benefits as an ISA. Furthermore, even if you were receiving interest income above £1,000 per year and we assume you are a basic rate taxpayer, it still makes more sense to opt for a non-ISA savings account if it offers more than 20 percentage point higher rates, e.g. a non-ISA 1yr fixed rate at 1.2% will provide a better financial outcome even after taxes than any Cash ISA 1yr fixed up to 1%.

It’s good to be free of the box sometimes, particularly if there is a financial benefit. Perspectives and broader considerations can reveal previously un-thought-of directions. Find your own and don’t be afraid to question some fundamentals from time-to-time.