Savers told ‘don’t look gift horse in mouth’ as deadline to use-up allowances loom
Boris Johnson announces new national lockdown
The latest UK lockdowns have been dubbed lockdown 3.0, with Britons being told to stay at home. Amid the stringent restrictions, Laith Khalaf, financial analyst at AJ Bell, has taken a look at what it could mean for personal finances.
Some of his predictions includes the chances of an interest rate cut in 2021 now being at 50 percent.
According to Mr Khalaf, the lockdown means another bulge in cash savings can be expected, however he warned the rules will mean greater financial hardship for many.
Mr Khalaf said: “Markets are now pricing in a 50 percent chance of an interest rate cut this year, based on the economic damage that will be done by another lockdown.
“That’s up from 30 percent just a week ago. The next Bank of England policy meeting is at the beginning of February, so the MPC members have time to take a deep breath and see how the next few weeks go.
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“The sanguine response of the stock market suggests there is still a high degree of confidence that vaccines will make this lockdown a final push for the line, so much will now depend on the roll-out of immunisations, as well as the effect of social restrictions on the spread of the virus itself.
“The Prime Minister has signalled that we are looking at the back end of February at the earliest before restrictions can be eased. That puts the Chancellor in a tight spot, seeing as the Budget has been scheduled for 3rd March.
“An economy that is just beginning to emerge from lockdown is not going to be in great shape to bear the tax rises the Treasury has to push through to balance the books.
“The new lockdown therefore means less chance the Budget will be a platform for fiscal repair and more chance it will be about keeping the wheels of the economy turning. But while tax rises may be delayed, they are still very much in the post.”
The financial analyst also suggested savers may want to look into savings options ahead of the end of the tax year in April 2021.
“With the end of the tax year now in sight, savers shouldn’t look a gift horse in the mouth by spurning their annual ISA and pension allowances, which run out on April 5,” he said.
“Of course, a renewed lockdown will increase financial pressure on many businesses and individuals. The FCA found that the first national lockdown pushed 2 million people into financial difficulties and we can expect that trend to raise its head again.
“As we know the pandemic has created a two-tier nation though, as those who have kept their jobs and income have found their finances improved by the imposed frugality of lockdown. This means we can expect cash accounts to bulge once again, as spending options disappear.
“One thing which will be in plentiful supply in the coming weeks will be time and so lockdown at least provides an opportunity to conduct a root and branch review of your finances to really get a headstart in 2021.
“Hopefully getting this out of the way will leave you with more time later in the year to focus on more enjoyable activities, as and when they become possible again.”
The financial analyst also commented on the potential impacts the lockdown could have on interest rates and cash savings.
“Interest rate markets are now pricing in a 50 percent chance of the Bank of England cutting rates this year, with a 50 percent chance they will remain on hold,” he said.
“The worsening economic picture as a result of the new lockdown has shifted these odds from 30 percent/70 percent respectively over the last week.
“Irrespective of whether or not there is a cut in 2021, savers should brace themselves for ultra-low interest rates for the foreseeable future.
“Unfortunately, inflation is expected to rise this year, slowly and to a modest level, but that means cash is going to lose more of its buying power while it’s sitting in accounts paying miserly rates of interest.
“Over £150billion was saved into cash accounts last year, as consumers found themselves with nowhere to spend their money thanks to lockdown. We can expect a similar bulge as the current lockdown hits.
“Savers shouldn’t just let this cash build up in their current account, which is likely to be paying a pitiful amount of interest. Instead think about moving that money into a savings account and shop around for the best rates on offer.
“As part of the process it’s worth considering fixed term accounts, which tend to offer a bit more interest if you’re willing to lock your cash away for longer.
“Typically six months, one year, three year and five year terms are available. If you’re thinking about locking your cash away for longer, then you might consider putting some of it to work in the stock market.”
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