BLOG: The option for savers who have disposable cash
During lockdown, Brits saved an average of £54.67 per week on leisure activities, while working from home allowed them to save a further £44.78, equating to a total saving of £99.45 per person per week.
Extrapolating those Office for National Statistics figures to a wider population means that Brits saved a collective £4.6bn for each week of lockdown.
With that in mind, if you’ve built up pandemic savings and are deciding what to do with the sum, it’s a good idea to take stock of your overall financial position, and to consider several points including:
- Do you already have other savings and investments?
- Will money be required for any major known expenses?
- Do you have any contingency or debts?
Depending on the answers to these questions and how much cash you have, here are some of the solutions.
If you have outstanding credit or store card balances, it would be worth using these funds to repay or reduce them. Card borrowing is among the most expensive and there isn’t an investment that would generate a greater return than the cost of this type of borrowing.
Once debts are repaid, a good idea would be to consider retaining the balance as an emergency fund if you do not already have some money put away for unexpected expenses.
If you have a larger sum available, the recommendation is similar. Look first to your borrowing and keep back some funds that are easily accessible. If you are a taxpayer, you might want to use a cash ISA for some of your savings. This will allow any interest generated to be paid free of tax.
If you are able to leave your investments untouched for a longer period you might look at investing in a stocks and shares ISA. You can select an appropriate investment using one of the many investment platforms.
If you are also able to save on a regular basis, you could also make regular contributions to your investment account. Everyone has an annual ISA allowance of £20,000 which can be used to invest in a cash or a stocks and shares ISA, or you can have one of each, as long as the total allowance is not exceeded.
£10,000 – £20,000
Having considered whether you should repay debts and ensuring you have a ‘rainy day’ fund for emergencies, it is then important to decide how much access you will need to your savings. You could use some of your savings to make pension contributions. If you have earned income (salary or self-employed earnings) you can contribute up to £40,000 a year or 100% of salary – whichever is the lower – to a pension scheme.
If you do not have earnings then you can contribute up to £3,600 each year. There are many benefits of pension savings. The contributions you make attract tax relief at your highest rate. A £1,000 contribution made by a basic rate (20%) taxpayer would cost £800.
For a higher rate (40%) taxpayer the net cost is £600. It follows that for someone paying tax at 45% the net cost of a £1,000 pension contribution would be £550. All investment growth within the pension is tax-free. There is no access to the pension until at least age 55 and the minimum pension age is due to increase to age 57 on 6 April 2028.
If you are a member of a workplace pension scheme it is worth checking if there is any employer incentive to increase your own contributions. Some employers offer matching arrangements, so for example, every extra 1% you contribute they match this up to say 3%. Taking advantage of this is almost the same as gaining a pay rise. While the tax breaks offered by pensions are attractive, the one downside is that you need to wait to access you cash, that is when you reach pension age.
Therefore, it is worth considering dividing savings between short, medium and longer-term assets. For the short-term cash accounts are really the only option and it is a case of looking around for the best rates. If you are a taxpayer and have not already used your annual ISA allowance you could opt for a cash ISA. If you wish to invest some of your savings for the medium to long-term then contributing to a stocks and shares ISA should provide a better return but be prepared to hold investments for at least five years.
Above all, it is always vital to keep those questions in mind to ensure you’re making the right decision considering your short to mid-term situation.
Christine Ross is head of private office at Handelsbanken Wealth & Asset Management