Seniors relying on investment income are suffering
Warning, current term deposit rates are likely to cause an injury.
Before phoning your bank, ensure a couple of rolls of Sellotape are placed under the wheels of your office chair. When faced with financial shock, the fast twitch muscles in your legs may create a propellant force, firing the chair backwards and denting the gib-board behind you.
For those who haven't rolled over a deposit in a couple of years, the added protection of a bicycle helmet is advised.
This handy advice is sourced from recent experience – as recent as a few hours ago in fact. I invested some money at 2.8 per cent today. That's the gross rate of interest and tax is still to come off. It hurt a lot.
Sure, it was only for a fixed term of three months so you'd expect some unpleasantness, but "2.8" felt like a tar and feathering. Mid-2015 the same deposits were paying an average of 3.6 per cent. That's a fall of more than 20 per cent in savers' income.
For the retired population reliant on interest, the carpet has been pulled from under them. Pensioners tend to hover around three-year and five-year fixed rates to get certainty of income, but even these look like road kill.
The average three-year deposit is currently paying 3.68 per cent, down 27 per cent in just over 18 months (from 5.05 per cent). There's a worse picture with five-year deposits. Currently averaging 3.79 per cent, they've staged a 31 per cent fall from 5.53 per cent.
Many retirees get a good proportion of their income from interest bearing instruments. Imagine a wage earner -experiencing 20 to 30 per cent swings over such short periods. It's entirely different when rates are higher, as despite the volatility you are still left with net income levels that are decent.
Taking tax off deposits at these paltry rates leaves very little in the pot.
A call for tax-free accounts
While much is written about alternatives such as equity income funds, bonds and the unavoidable capital drawdowns, there is always a need with retirees to keep some fairly hefty amounts of savings in cash.
It's a massive shame we don't have a tax-free savings regime such as the UK. With other asset classes such as shares and property having tax advantages for long-term investors, cash is the poor cousin.
When you learn about the British tax-free accounts, they've had their share of complications, but are hard to fault in purpose and usefulness.
More recently they've become very simple. Each person is allowed to put £15,240 ($32,425) into a tax-free account each year. Yes, that's every single year and couples are allowed one each so the amounts double in a family. They're known as ISAs (Individual Savings Accounts).
Kids under 16 get a JISA, a junior version allowing tax-free savings of £4,080. Each tax year a new account can be opened.
The whole amount can be put into cash deposits, shares, or split in any fashion. If you withdraw money, you can't top it back up and any unused portion is lost. It encourages regular savings patterns and helps alleviate some of the pain of low interest rates.
In addition, come April, the Brits are introducing a new Personal Savings Allowance which means the first £1000 interest earned in any account is tax-free.
While interest rates are cyclical and won't always be at these levels, the need for a system to promote simple savings and protect the more modest saver from tax would partially level the playing field. We don't need a dual system like the British or even such a generous one.
Most of us would agree, any tax-free savings band would be positive.
Written by Janine Starks. First appeared on Stuff.co.nz.
* Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.
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