READERS' LIVES: National Savings: the pros and cons
Interest rates for National Savings ... personal pensions ... mortgages . Your queries answered
Sunday 10 August 1997
As expected, higher National Savings rates have indeed been announced recently. Income Bonds will be paying out 0.5 per cent more from 5 September, the rate rising to 6.5 per cent, or 6.75 per cent on balances over pounds 25,000. Rates on higher balances in National Savings Investment Accounts went up last week, with the top rate now 5.75 per cent. And the new 11th issue of index-linked certificates pays 0.5 per cent more than the previous issue. You now get inflation, plus 2.75 per cent,
But some rates have stayed the same, including fixed-rate National Savings certificates. The rate on these was deemed to be competitive with things like gilt yields. Of course, that could change at any time. Base interest rates went up again last week and there may be further increases.
The present 44th issue of fixed-rate National Savings certificates pays a rate of 5.35 per cent a year if you hold them for the full five-year time. The return is tax-free and worth the equivalent of 6.7 per cent gross to basic rate taxpayers, 8.9 per cent to higher rate taxpayers. These are good five-year rates, especially for higher-rate taxpayers. Rates might be even better in a month or two - but they might just stay as they are.
The limit on reinvesting matured certificates into the current issue was abolished in April. So you can reinvest as much as you like. The limit for new money is pounds 10,000 for the fixed-rate 44th issue, and the same for 11th index-linked issue.
One other point. It is not quite fair to describe the general extension rate as "penally" low. The general extension rate is what fixed-rate National Savings certificates earn at the end of their five-year life until they are cashed in (or reinvested in the current issue). The general extension rate is 3.51 per cent tax-free, worth about 4.4 per cent to basic-rate taxpayers, 5.85 per cent to higher-rate taxpayers. You can do better (depending on how much you have to invest), but you can also do much worse.
I am 28 and have been paying into a public sector pension for six years. I am now taking up a three-year temporary position in the voluntary sector. There is no pension with the new job. I may rejoin the public sector at the end of three years. Should I take out a personal pension for this three-year period? Should I transfer my existing public sector pension into a personal plan? If I don't, will it remain frozen? Should I wait for the outcome of the current government review of pensions?
You have already received contradictory advice from two independent financial advisers. Paradoxically, this emphasises the importance of getting more than one opinion. Pensions are a minefield. The wrong move could cost you dearly. It will eventually be up to you to decide who offers the most convincing arguments, but do also consider a third opinion from a fee-charging pensions specialist. The Society of Pension Consultants (0171 353 1688) can give you a list of its members. Here are some further thoughts:
q Check out the precise rules of your existing employer's scheme. As a public sector scheme, it probably offers excellent benefits and may include full inflation-proofing of the pension once it is paid in your retirement.
q The existing value of your pension won't be frozen. There are rules that require deferred pensions to be revalued in line with inflation of up to 5 per cent each year. So it may be sensible to leave your pension rights where they are, even if it turns out that you don't return to a similar public sector job.
q You are only 28 and already have six years of accumulated pension rights behind you. It may not matter if you delay starting a personal pension plan for the next three years. You could wait to see whether you will return to the public sector and, more importantly, whether there is any prospect of a simpler, more flexible and cheaper pension regime.
Specifically, under existing rules, you can backdate payments into a personal pension plan by six or more years and can get backdated tax relief. You can get tax relief on pension contributions to a personal plan of up to 17.5 per cent of your pay (more once you reach 36). So, for example, if you earn a total pounds 60,000 over the next three years, you would then be able to pay pounds 10,000 as a lump sum into a personal plan.
q If you do postpone starting a personal plan now, get further advice in three years' time. It might be appropriate at the time to pay a lump sum into a personal plan and then transfer it into your new employer's scheme, such are the complications of the pension rules.
q In the meantime consider putting what you would have paid into a pension plan into a tax-free PEP instead. This will provide you with the lump sum you may need.
q If, however, you start a personal plan, go for a deal that treats each premium as a single premium. Be wary of plans that require long-term regular premiums and that penalise you heavily if you withdraw early.
We have a pounds 100,000 mortgage divided into a pounds 70,000 endowment loan to be paid off in 13 years and a repayment loan of pounds 30,000 with 22 years to run. We will soon have pounds 20,000 to pay off some of the mortgage. Which part should we pay off?
You will have to discuss this with your lender. The main issue here is the Miras tax subsidy. From the lender's point of view, do you have two discrete loans? If so, make sure that you pay off the loan without the subsidy.
The other issue is what you want to happen after you have made the lump sum repayment. Say the pounds 20,000 goes against the repayment element of your mortgage and you then carry on making the same monthly payments, you will pay off that part of the mortgage sooner than planned. You may prefer to keep the existing mortgage term and reduce your monthly outgoings. You could ask for the repayment term to last another 13 years to coincide with the endowment part of the loan. Be sure to tell your lender what you want.
Also find out exactly when your lump sum will reduce the interest you are charged. If, for example, interest will continue to be charged on your existing balance until the end of the lender's financial year, you might as well delay making this payment until nearer the end of the financial year.
One other point. Check whether there are any big penalties if you pay off part of your loan early or within the first five years. If there is a penalty, you will have to weigh the pros and cons of paying the penalty or of keeping your pounds 20,000 on deposit and earning interest.
q Write to Steve Lodge, Personal Finance Editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number. Alternatively, fax 0171-293 2096/2098 or e-mail: firstname.lastname@example.org. Do not enclose SAEs or any documents that you wish to be returned. We cannot give personal replies or guarantee to answer every letter. We accept no legal responsibility for any advice given.
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