Interactive Investor

What does 2021 have in store for your personal finances?

29th December 2020 12:13

Sam Barker from interactive investor

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Savings rates are likely to stay low, but there is plenty for consumers to watch out for next year.

As we near the end of a less-than-perfect 2020, it is only natural to hope that next year will be better. This is true for our finances as much as it is for our physical and mental health, all of which have been at risk during the Covid-19 pandemic.

So, what will 2021 mean for our money?

Economy

Let’s start with what we know. The economy is currently depressed and unlikely to get back to pre-coronavirus levels until the fourth quarter of 2022, according to chancellor Rishi Sunak in November.

On a national level, this means our personal finances will suffer too, as wages will be suppressed and redundancies more likely.

However, there will be economic growth next year. The Office for Budget Responsibility has said gross domestic product will grow 5.5% in 2021 and 6.6% in 2022.

Savings rates

Interest rates on savings deals are at record lows and, sadly, 2021 is unlikely to see any improvement in the short term.

The main reason for low rates is that the Bank of England cut the base rate to new depths of 0.1% this year. The base rate is factored into the savings rates paid by banks, and many cut these in response.

But there is a positive way to look at this, according to Tom Adams of financial analysts Savings Champion.

He said: “Rates are at record lows and overall next year you would think that the only way is up.”

Increases in savings rates are also driven by competition among providers, but this is currently absent.

However, there was a glimmer of hope in 2020 that shows savings firms might still have some fight left in them.

Fixed-rate bonds lasting 12 months dipped to a low of 0.86% in June. But in August the best-buy deal rose to 1.2%, from QIB (UK), far outstripping any other one-year savings deal and matching the top rate available in January before Covid-19.

Adams added: “If providers want to encourage savers to join up, then increasing rates is the way to do it. We would expect, when things start to settle, that we will see more competition in the market.”

Inflation

We can’t talk about savings rates without talking about inflation. It is currently 0.3%, but the Bank of England thinks it will rise to 1.8% in 2021, and it has a target of 2%.

That’s a problem, because no savings deals currently even pay 1.8%, bar a couple of very restricted current accounts.

Savings held in accounts paying less than inflation will lose spending value.

But it is still important to hold some money in a cash account, if possible, to cover emergencies.

Rachel Springall, of financial experts Moneyfacts, said: “In 2021, if consumers are able, it’s wise to take advantage of any government savings initiatives (Lifetime ISA, Help to Save, Personal Savings Allowance, ISAs) during any time, but particularly during a low interest rate environment, and ensure they have an emergency cash fund easily at hand.”

Future tax rises?

The UK has already racked up a £394 billion borrowing bill to tackle the coronavirus outbreak. The question is: how will we pay it back?

Measures suggested by think tanks include watering down the state pension, increasing Capital Gains Tax and a one-off wealth tax on pensions and property. All would save the state money and help repay the Covid-19 debt.

Sunak’s November Spending Review was light on details of any such repayment strategy and the next date for any big announcement is the Budget in March 2021.

The exact date has not yet been revealed, but all eyes will be on the chancellor on the day.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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