One of the most recent rate cutters was National Savings & Investments (NS&I), whose rate reductions will mostly take effect during June. Two of NS&I’s more popular offerings, the Income Bond and the Direct ISA, will have their rates cut from 1.25% to 1.00% (National Savings Advice).
Viewed another way, that is a drop of one fifth in the interest payable. NS&I are also reducing the prize fund interest rate on Premium Bonds, from 1.35% to 1.25%.
The prize fund cut has forced two changes to the structure of bond prizes. Firstly, the odds of a win in the monthly draw will get worse, moving out from 26,000:1 to 30,000:1. The second change is a revamping of the prize mix, with fewer of the £500 and over prizes. If you win in a monthly draw after the change, over 93% of the time your prize will be just £25.
NS&I are normally not near the top of the league table for interest rates. In part NS&I blames the falls on the fact that it had become too competitive because the banks and building societies have been axing their rates. At the time of writing (May 2016) the best instant access rate was 1.45%, while even the top five year fixed term rate was only 2.70%.
In theory rates could go lower – Japan and the Eurozone are both experiencing the bizarre world of negative interest rates in which some depositors pay interest and borrowers can earn interest. So far Mark Carney, the Governor of the Bank of England, has ruled out negative interest rates, but then so did the governor of Japan’s central bank, until he changed his mind.
Press reports in May suggested that the Bank of England could reduce interest rates if the UK votes for Brexit, although other commentators have said the same result will force the Old Lady to raise rates to protect the pound. If there were a rate cut, then negative territory becomes a greater possibility for the UK.
Strangely, while savers’ interest rates have been going south, the dividend yield on UK shares has been increasing. As at early-May 2016, the UK stock market had an average dividend yield of 3.79%, 0.6% higher than twelve months previously. And do not forget that in 2016/17, the first £5,000 of dividends you receive are free from tax, regardless of your marginal tax rate. The personal savings allowance only exempts £1,000 of interest from tax (if you are a basic rate taxpayer) or £500 if you pay tax at 40% (additional rate taxpayers receive no allowance).
There is a wide range of UK equity income funds to choose from although, as ever, there is more to selection than just going for a single number – the highest yield. Some funds have a much better track record for growing their income than others, an important factor when some big names, like Tesco and Barclays, have cut pay outs to investors.
To gain an insight into the best-of-breed UK equity income funds, talk to us. The income will be a lot more interesting than that from NS&I.
National Savings Advice And Financial Advice Bristol
If you would like to speak with one of our Independent Financial Advisors and potentially receive financial advice, please contact us on 0117 923 7652. We are based in Clifton, Bristol but we are happy to service clients from across the UK and we provide free initial meetings at our client’s convenience.
Churchill Wealth Management Limited is located at 13 Alma Vale Rd, Bristol BS8 2HL, United Kingdom.
About Us: Churchill Wealth Management is a team of independent financial advisors/financial advisers (IFAs) based in Clifton, Bristol. We provide independent financial advice, including pension advice, investment advice, inheritance tax planning and protection/insurance advice.