5 Reasons It Might Be Time to Restructure Your Sole Proprietorship

The sole proprietorship is the simplest business structure to create and maintain. It’s the default business structure for solo business owners. If you’ve started a business and haven’t filed for a formal legal structure yet, then your business is a sole proprietorship.

There are minimal legal costs associated with forming a sole proprietorship: you just need to make sure you’re complying with any local zoning and business permit laws. Additionally, a sole proprietorship has few formal business requirements. Sounds good, right? This simplicity and affordability are why many small businesses in the US operate as sole proprietorships.

However, there are several drawbacks to the sole proprietorship, and many entrepreneurs eventually restructure their sole proprietorship to a corporation or LLC (Limited Liability Company).

If you’re currently running a business or plan on launching one soon, take note of these five reasons why it might be smart to restructure your sole proprietorship:

Reasons To Restructure Your Sole Proprietorship
1. You’re Concerned about Personal Liability

The sole proprietor of a business can be held personally liable for the debts and obligations of the business. Your own personal savings, property, and other assets are at risk to settle any debts of the business. If something should happen and your business is sued or can’t pay a debt, you will probably be required to pay up from your personal savings or property. This is because with a sole proprietorship, there’s no separation between the business and business owner; they’re one in the same.

When you form a corporation or LLC, you are separating the business from the business owner. In many cases, this offers a shield between your personal assets and the business. In industry terms, we refer to this as the “corporate veil.” A corporation (or LLC) exists as its own entity: it’s responsible for paying its bills, meeting its obligations, etc. Whether you’re in a high-risk business (like catering or selling a product to consumers) or a low-risk business (like writing), unexpected things can happen and having a corporate shield can bring peace of mind that your personal assets are protected.

2. You Want an Investor or Loan

If you plan on expanding in the future, either by finding an investor or getting a business loan, then you’ll need to have a formal business structure that’s different than a sole proprietorship. As a sole proprietor, you can only get a personal loan; that’s because there’s no separation between you and the business. Likewise, investors typically won’t invest in a sole proprietorship, as there’s no way to divide ownership or issue shares for the company. In order to receive a business loan or investment, you need to separate the business from your personal finances by setting up a legal business entity such as a corporation (C Corporation or S Corporation) or LLC.

3. You Start Working with Larger Businesses

In the course of growing your business, you may seek out work with a larger company and be surprised that their contract stipulates that you’re operating as a corporation or LLC. This is for a few reasons. First, there’s an assumption (whether it’s correct or not) that an Inc. or LLC is a more stable and trustworthy business partner than a sole proprietor.

In addition, there has been a lot of discussion over the past few years about the IRS cracking down on companies that improperly classify workers as contractors instead of shelling out payroll taxes and other benefits for an employee. If a company hires a sole proprietor for contract work, they may need to show proof to the IRS or state that the worker is indeed independent and should be considered a contractor. Yet, if a business hires an LLC or corporation for the same work, there’s no question about the classification.

4. You’re Looking for More Flexibility with Your Taxes

Since there’s no separation between the individual business owner and business, sole proprietors report all their business income on their personal tax return. Some first-time entrepreneurs and solo workers are surprised to discover how much they need to pay in self-employment taxes. By forming an LLC or corporation and electing S Corporation status, it’s possible to lower what you pay in self-employment taxes. In addition, corporations can get other tax advantages, such as claiming medical insurance for families as a deductible, and being able to leave profits in the corporation. It’s always wise to speak with a CPA or tax advisor to find out which business structure can provide you with the optimal financial situation.

5. You’re Ready to Think of Yourself as a Business Owner

For some, the simple act of filing business formation paperwork creates a powerful shift in perception: you start thinking of yourself as a business owner, rather than just as self-employed. When you consider yourself self-employed, you’re basically an employee (with really bad benefits!) But, once you start thinking of yourself as a business owner, you’ll stand a little taller and start thinking strategically about the best ways to grow the business outside of putting in more hours. Of course, you don’t need to be a corporation or LLC to start thinking like a business owner, but for some, this level of formality helps.

While an LLC or corporation is more involved to set up than the sole proprietorship, the paperwork can be done in just a few hours, giving your business a solid legal foundation for years to come. And, if you’re particularly concerned about keeping your formalities to a minimum, consider the LLC: it offers the same personal liability protection as the corporation, but with fewer administrative requirements!

Woodworker Photo via Shutterstock

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Savers have more long-term misery as they face worse interest rates

The average rate in this sector is now 1.98 per cent, down from 2.20 per cent a year ago and 2.59 per cent two years ago.

Moneyfacts said the current average rates on these deals are the worst it has seen, based on its records going back to 2008.

It said even longer-term deals in the best buy tables now offer returns of less than three per cent – showing the need for savers to act quickly if they see a good deal.

A new personal savings allowance was introduced on April 6, taking most people out of paying any tax on their savings interest altogether.

Under the new allowance, basic rate taxpayers can earn up to £1,000 in interest without paying tax on it, and higher rate taxpayers can earn up to £500 in interest tax-free. Isas, which are already ring-fenced from the taxman, do not count towards the new personal savings allowance.

30-year FRM rated hit 3-year low

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How to Fix Social Security? Expand It

Below is an adapted excerpt from Expand Social Security Now! How To Ensure Americans Get the Retirement They Deserve by Steven Hill, published by Beacon Press on May 10, 2016.

Increasing numbers of workers now find themselves on shaky ground, turned into freelancers, temps, contractors, and part timers. Even many professional jobs are experiencing this precarious shift. Within a decade, it’s been estimated that nearly half of the 145 million working Americans could be impacted, turned into so-called “independent workers” with little job security, insufficient safety-net supports, and poor wages. 

Add to that new anti-worker methods such as “just-in-time” scheduling and the steamroller of automation, robots, and artificial intelligence already replacing millions of workers and projected to “obsolesce” millions more, and suddenly things don’t look so economically set for a lot of Americans.

Now an insidious mash-up of Silicon Valley technology and Wall Street greed has thrust upon us the latest economic trend: the so-called “sharing economy,” with companies that offer short-term freelancer employment with low pay, no safety net, and a need to be in constant job search mode, looking for the next gig. One Uber driver with whom I spoke laughed bitterly when I mentioned the term “sharing economy.” “More like the ‘share the crumbs’ economy,” he said.

It’s an alarming transformation. The US middle class, one of America’s greatest inventions and a gift to the world, is in danger. The future is anything but secure. Set to replace the crumbling New Deal society is a darker world in which workers can be hired and fired by the touch of an app–turned on and off like a water spigot.

These changes mark one of the great social and economic transformations of the postwar era. A seismic shake to the supportive edifice for American workers has cracked and is beginning to crumble for all but the better-off. Not since the Great Depression have we been so in need of a system of retirement security that acts as both a buffer for individuals and families from the sudden shocks of economic downturns and bursting asset bubbles, but that also acts as an automatic stabilizer and stimulus capable of steadying the broader macroeconomy. At the very time when Americans most need a stable retirement system, it is more threatened than ever.

So yes, our economy is changing, and yes, Social Security must change with the times. But the change that must occur is not cutting it back, quite the contrary. We have to expand Social Security and create a robust, single-pillar retirement system for every worker, one that is portable from job to job. And one that functions even for those workers who have multiple employers.

So the safety net has to work for these new types of workers, and for many different classifications of workers. That’s what the need is, and an expanded Social Security could best provide the retirement portion of this new kind of safety net for this new kind of economy. No other system or method–not 401(k)s, IRAs, the remnants of company pensions, the loopholes of tax deductions and deferrals, or any other current method, even if scaled up–are capable of playing this role. Only Social Security can do it. And yet Social Security’s payout to each individual is so meager that, unless it is expanded, it will not be robust enough to play this central role as the nation’s de facto national retirement system.

 

Social Security Plus–the Only Solution Left Untried

Winston Churchill allegedly once said, “You can always count on Americans to do the right thing–after they have tried everything else.” We’ve tried just about everything else to create a secure retirement system for seniors, and to stabilize this part of the consumer demand that drives our economy. What we haven’t yet tried is Social Security Plus.

Late 19th-century German leader Otto von Bismarck first pioneered the idea of old-age government pensions, and it has since become a staple around the world. A universal social support system, whether in Europe, Canada, Japan, or Australia, is guided by a philosophy that values the creation of “social insurance” that helps individuals and families prepare for their future, including retirement. In fact, the various social insurance systems force individuals to prepare, paycheck by paycheck, by deducting from workers and businesses the funds necessary to better secure their futures. Universal social insurance means everyone pools their money, which is a crucial step that allows better planning and the creation of more efficient and less expensive support systems. Consequently, European systems of health care, child care, senior care, housing, and education cost much less per capita compared to US systems, because the efficiencies that can be designed into universal systems make them much more economical and cost-effective.

For example, the United States spends over 17 percent of gross domestic product (GDP)–about $2.9 trillion, or $9,255 per person–on a decentralized hodgepodge health-care system that is very expensive to administer and operate. Even after the improvements of Obamacare, health care still doesn’t cover about 11 percent of the US population. But European nations spend about 6 percent to 12 percent of GDP (depending on the country) and cover 100 percent of their populations. Americans also spend at least six times more per capita for child care (depending on the country), and while university tuition is skyrocketing in the United States, in most European nations it is still quite inexpensive, only a few hundred dollars per year.

The Swedish Social Insurance Agency publishes a brochure that captures the prevailing philosophy: “Social insurance is founded on the idea of people helping each other through a kind of social safety net, which is in place from birth to retirement.” Netherlands Labor Party leader Wouter Bos has argued that Europe’s social state is based on “enlightened self-interest” since “we all run the same risks, so we might as well collectively insure ourselves against those risks.” This is a philosophy with broad agreement across the political spectrum; even conservatives and the so-called far right agree, forming the basis for a “European consensus.”

So enacting a version of Social Security Plus is not as untested as it may at first appear. In many nations around the world, more comprehensive social support systems aid families and individuals and cushion vulnerable populations against economic dislocation. Nevertheless, in the United States we continue stumbling forward with our more ad hoc, decentralized, and inefficient systems, in which some people get the support they need and others don’t. And the support systems are so poorly designed that the national price tag is often exorbitantly expensive. The more deregulated US system is known for allowing individuals to keep more of their paycheck–presidents from Ronald Reagan to George W. Bush were famous for declaring, “We let you keep your own money”–and leaves it up to Americans’ discretion whether to prepare for the long run by saving money and handling the costs of retirement, or to spend it all in the short run.

But in an age of globalized capitalism and increasing economic insecurity, benefits like an adequate retirement, as well as health care, child care, sick leave, education, housing, and more, are no longer discretionary–they are necessary in order to enjoy a basic level of security and comfort. What this points to is that in today’s insecure age, a middle-class standard of living is not only about income levels or economic growth rates, but also about adequate support institutions and social insurance for individuals and families.

Japan, Canada, and countries in Europe and elsewhere have already established various vehicles to ensure their health, productivity, and quality of life that will serve them well in the new, high-tech economy. While all of these nations, like the United States, rely on powerful capitalist engines as the core wealth generator of their economies, the presence of a more robust social insurance infrastructure is the reason that these other nations have a higher level of economic security for their people than does the United States. The US is the outlier among developed nations; our “ownership society” should be called an “on-your-own” society because many people are truly left on their own.

The security of social insurance in turn stimulates consumer spending, which in turn creates jobs, which in turn acts as an automatic stabilizer during downturns. It unleashes a virtuous feedback loop, based on these necessary components of a modern capitalist economy today. A more comprehensive social insurance system allows these other countries to achieve one of America’s chief principles, namely, “life, liberty, and the pursuit of happiness,” with results that are vastly different from the American “pull yourself up by your bootstraps” society. Expanding Social Security would be an important step toward providing for all Americans the type of efficiencies that modern capitalist economies need in order to provide retirement security.

One can anticipate various objections, criticisms, and even fear of creating a Social Security Plus system. “It has never been tried before” (at least not in the United States), “it’s socialism” (even though 70 percent of Republicans support Social Security), “it’s already going bankrupt” (nonsense), and “where would we find the money?” (how about from all the hundreds of billions of dollars in tax loopholes that predominantly favor wealthier Americans?). Already there exists a concerted and well-funded effort to convince Americans that Social Security is broken and that we need to cut it back and even privatize it “in order to save it.” So I’m very aware that some Americans, both leaders and everyday citizens who have grown so suspicious of government, will reject out of hand the notion of doubling the monthly benefit.

But what can’t be denied is that the “three-legged stool” of retirement security in the United States has become wobbly and unstable. Two of the legs–private, employer-based retirement plans, and private savings based on homeownership–have nearly collapsed. Combine that with vast increases in inequality, flat wages, and a decline in personal savings in the years even before the Great Recession, and Social Security is now the only leg standing for tens of millions of Americans. An expansion of Social Security–one of the most successful and popular government programs in US history–into a more robust retirement system that doubles the current payout to individuals would build upon the most stable components of the current system.

The president and Congress, in their budgetary duties, and the US Federal Reserve bank in its financial oversight capacity, have all the levers they need to ensure financial viability. This is a matter of politics, not economics. It is clear that the best way to stabilize and strengthen the retirement system, as well as the broader national economy itself, is to expand Social Security, bringing the American retirement system more in line with those in other developed societies. This can be accomplished by making the Social Security payroll tax fairer and more universally applied, by eliminating deductions for businesses that provide retirement plans (since that would be unnecessary with Social Security Plus), and by rolling back or limiting various tax-favored loopholes and deductions that massively favor wealthier Americans. Multiple mechanisms and plans are possible toward those goals.

More broadly, the United States must begin to view universal social insurance as a critical pillar of support for Americans and their families, as well as for US businesses that currently miss out on the competitive advantages that would come if retirement and health-care systems were not substantially employer-based. The United States was once noted for its capacity for economic, political, and social innovation; in the aftermath of World War II, we created a land of broadly shared prosperity and opportunity, and starting in the 1960s began extending access to racial minorities, women, the LGBT community, and more. We have to rediscover our genius for that kind of innovation. We have to recognize that it is possible to create an affordable retirement system that is both decent and stable. This is not rocket science; it’s a matter of political will, not a failure of design.

Retirement experts like Laurence Kotlikoff, Philip Moeller, and Paul Solman, in their best-selling “advice” book Get What’s Yours: The Secret to Maxing Out Your Social Security, have provided a nice handbook on how to boost your Social Security benefit, using clever schemes like “file and suspend,” “spousal benefits,” and other brainy ploys. But wouldn’t it be better to have a retirement system that provides adequate income for seniors without having an accountant’s insider knowledge of the byzantine rules and tricks? The enormous gap between what is needed and what is being proposed by the politicians and professionals is glaring evidence that we need a completely new and pragmatic approach.

We don’t need to cut Social Security, or trim it, or pare it back, or privatize it, or raise the retirement age, or use chained CPI (consumer price index) to reduce the annual cost-of-living allowance. Even maintaining the status quo is woefully inadequate at this point. We need to expand Social Security, and we need to do it now. That is the only sensible solution to the retirement crisis. And we have a roadmap for how to get there: Tax fairness equals retirement security, which equals economic stability.

Any movement that seeks to enact expansion of Social Security must link that to a call for tax fairness, since that is the most salient source of the revenue needed to pay for the Plus system. By re-allocating federal tax and expenditure priorities that currently provide huge financial advantages to a small number of better-off people and concentrating them instead on the vast majority of Americans, we can create a retirement system that will work for all of us, instead of some of us.

The creation of expanded Social Security Plus would provide a secure and comfortable retirement for every American, and contribute greatly toward a solid foundation from which to build a strong and vibrant 21st-century economy. Our retirees, our families, our businesses, and our communities deserve no less.

Reprinted with permission from Beacon Press.

Terry McLaughlin: There are unintended consequences of well-intentioned legislators

On April 4, Gov. Brown signed legislation increasing California’s hourly minimum wage to $15 by 2022. Labor experts are already warning that such a wage hike could lead to higher prices, more automation, and a drop in employment.

James Sherk, a research fellow in labor economics at The Heritage Foundation, said such a wage hike is likely to lead to a reduction in employment, especially for manufacturing companies that sell products across state lines. Those businesses do not have the opportunity to raise prices, and they employ approximately 1.6 million Californians — 37 percent of whom make less than $15 per hour.

“A lot of those jobs will move to other states and countries,” Sherk said. He also warned that in the fast food and hospitality industries, consumers can expect to see price increases to compensate for increased labor costs.

A Grass Valley restauranteur opined that the government is creating a domino effect that can only ignite inflation. The cost of food production will rise, beginning at the source with farmers, all the way up through the staff that prepares and serves the meals to consumers, and the only viable option in order to remain open for business is to increase menu prices.

This restaurant has already removed two of its most expensive items from the menu, as the prices would have had to be increased to an unacceptable level. If customers eat out less frequently due to higher costs, then staff would have to be reduced to reflect this decline in business. This restauranteur was particularly concerned about senior citizens in our community who are living on a fixed income and who will very likely see the cost of all consumer goods, not just food, increase. Social Security benefits are certainly not increasing at the same rate, nor is the interest rate earned on personal savings accounts.

Many businesses are already turning to automation as a way to cut down on labor costs. Self-checkouts are replacing cashiers in supermarkets and customers can place orders through kiosks in some restaurants. As reported by Forbes in February, a minimum wage increase in Seattle went into effect in April 2015. As a consequence, Seattle job losses from April to December 2015 were the worst over any nine-month period since the recession of 2009.

The Feb. 18, 2014 nonpartisan Congressional Budget Office report stated, “Increasing the minimum wage would have two principal effects on low-wage workers. Most of them would receive higher pay … But some jobs for low-wage workers would probably be eliminated, the income of most workers who become jobless would fall substantially, and the share of low-wage workers who were employed would probably fall.”

In January, Gov. Brown himself said “raise the minimum wage too much and you put a lot of poor people out of work. There won’t be a lot of jobs.” According to Brown’s own budget summary for 2016, raising the minimum wage to $15 an hour would cost the state of California $4 billion annually by 2021. Additionally, the state warned that not only would such a wage hike return the state budget to annual deficits, but it would also exacerbate a recession and add to job losses. Despite his own statement, and the caution recommended by his own budget summary, Brown passed this legislation.

Adding to the costs associated with a minimum wage increase, California has also legislated that employers provide all employees with at least three days of paid sick leave, and the state is moving forward with a bill which will give employees three days off per year with full pay to attend the school activities of their children.

State Senator Connie Leyva has introduced SB 878, the “Restrictive Scheduling Bill,” which would require employers, specifically restaurants, grocery stores, and retailers, to post a three-week work schedule. Any changes made to that schedule with less than seven days notice would require mandatory “modification pay” (in addition to regular pay) as well as potential fines. This bill does not take into consideration any of the issues that could cause the need for a change in staffing – such as the weather, cancellation of large group events, or even employee emergencies.

Regardless, the Senate Labor Industrial Relations Committee passed this bill 4 to 1 and moved it to the next step in the legislative process. The previously mentioned restauranteur said the government “is trying to ‘law’ us out of business!”

Is it any wonder that the business environment in California, which is becoming more inhospitable each day, is causing major employers to leave our state? Toyota is moving 4,000 jobs from California, Kentucky and New York to Plano, Texas. Carl’s Jr is moving their headquarters from California to Nashville, Tennessee, after the CEO of their parent company said, “while the US Government makes life needlessly miserable for businesses, California is exponentially worse.”

Trying to legislate “fairness” in the marketplace rarely brings positive results. Raising the minimum wage for low-wage workers feels like a good and compassionate concept. But we should not be creating laws and regulations purely because they feel good — we need to be asking if they do good. Once again, the citizens and workers of California will find themselves suffering from the unintended consequences of well-intentioned legislators.

Terry McLaughlin, who lives in Nevada City, writes a twice monthly column for The Union. Write to her at terrymclaughlin2016@gmail.com.

Trying to legislate “fairness” in the marketplace rarely brings positive results … we should not be creating laws and regulations purely because they feel good – we need to be asking if they do good.

How to beat record low savings rates

Savings rates have fallen to record lows following hundreds of rate cuts over recent months. 

Which? research reveals there were 1,440 rate cuts across the savings market last year – and a further 230 rates have dropped in 2016. 

Although low interest rates are welcomed by mortgage customers, savers are left with dwindling returns for their hard-earned cash.

However, there at still some attractive deals available for those who shop around.

Here, we highlight the best ways to make sure youre getting the most from your savings and investments.

Avoid zombie savings accounts

Many accounts on the market pay rock-bottom interest rates. First Directs Savings Account currently pays just 0.05% AER, while Santanders Easy Isa offers just 0.1% AER, and there are many more offering similarly poor returns. 

To ensure youre getting a competitive deal, its never been more important to keep an eye on the rate youre receiving, and to switch if necessary.

The Which? Money Compare savings and Isa tables let you search hundreds of savings accounts and Isas from providers large and small to find a great savings rate based on quality of service as well as cost and benefits.

Utilise your personal savings allowance

The new personal savings allowance (introduced in April) may make traditional savings accounts more appealing for millions of people. 

This is because basic-rate taxpayers will have no tax to pay on the first £1,000 of interest they earn in a single tax year. Higher-rate taxpayers will have no tax to pay on the first £500. 

At current rates, this means its now possible to deposit tens of thousands of pounds in a traditional savings account without paying tax on the interest this year.

Which? Money Compare table: instant-access savings accounts – hundreds of deals compared

Continue to bear cash Isas in mind 

Although the personal savings allowance seems generous while interest rates are low, this may not be the case when they start to rise.

Isas continue to provide a tax-free shelter for your savings, regardless of how much money you accumulate over time. We think they remain an attractive option, particularly if youre a higher-rate taxpayer or are likely to become one in the future. Your annual Isa allowance for 2016-17 is £15,240. 

Many Isas now offer increased flexibility, allowing you to withdraw funds and replace them without it affecting your annual allowance, as long as you do so in the same tax year.

Which? Money Compare table: instant-access cash Isas –  compare hundreds of Isas

Make the most of your current account  

Higher interest rates are available through current accounts paying interest on credit balance. 

For example, TSBs Plus account pays 5% AER on balances up to £2,000. Alternatively, Santanders 123 account pays 3% AER on balances between £3,000 and £20,000, although this account comes with a £5 monthly fee.   

Find out more: best bank accounts if you stay in credit – see our comparison tables  

Use regular savings accounts

As savings rates continue to fall, the regular savings market has seen an increase in rates, especially to deals made to run alongside a current account.

If you have a bank account with First Direct, HSBC or Marks and Spencer Bank, you may be eligible for their regular saver accounts, each paying 6% AER. Alternatively, Kent Reliance pays up to 4% AER on its Regular Savings account, which is open to all new customers. 

These accounts typically come with restrictions, including a cap on the amount you can pay in each month and a minimum monthly deposit. Some may not allow you to access your money for over a year. 

Which? Money Compare table: regular savings accounts – find a great deal

Consider investing your money  

If youre happy to take some risk with your money, investments offer the possibility of improved returns.

The first port of call for investors should be a stocks and shares Isa, which is a tax-efficient account that lets you put money into different types of investment, such as unit trusts, open-ended investment companies (OEICs), investment trusts and corporate or government bonds. You can also buy individual company shares to put into an Isa.  

Before considering investments, you should make sure your finances are in order. As a minimum, your debts should be under control and you should have a significant amount of savings to fall back on.

You should only invest if youre prepared to take the risk that your investments can go down, as well as up, in value.

Find out more: the beginners guide to investment – all you need to get started as an investor

More on this… 

  • Learn how your savings options are affected by the new personal savings allowance
  • Find out how your account compares to the best on the market using our savings rates booster
  • Have your savings questions answered by calling the Which? Money Helpline

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

How to get the best savings rates

By Melanie Wright

The Bank of England first cut the base rate to 0.5% in March 2009, which means for the past seven years savers have had to put up with measly savings rates. According to recent research by comparison site MoneySuperMarket.com, as a result 10% of savers have turned to stocks and shares individual savings accounts (ISAs) and a further 7% say they are taking a lsquo;riskier approach to saving, in the hope of getting better returns. Others, meanwhile, have been put off saving altogether, with 13% having withdrawn money from their savings and spent it instead.

Kevin Mountford, head of banking at MoneySuperMarket said: Savers have suffered for far too long now due to low interest rates and its really worrying that some have stopped saving altogether.If you are risk-averse and stocks and shares dont appeal, there are still some competitive savings options available if you know where to look. Bear in mind however, if youve got a large sum to invest, you will usually have to spread your cash between several different accounts if you want to take advantage of the best rates and also ensure your money is safe.

Susan Hannums, director of independent savings advice site Savingschampion.co.uk said: In todays climate with savings providers awash with cash, savers with larger sums face a dilemma, as the very best rates are offered by high interest current accounts that are restricted to smaller balances.

The key to earning the very best rate therefore is to divide your cash between accounts, not only to ensure your money is fully protected by the Financial Services Compensation Scheme (FSCS) which protects up to pound;75,000 per person, per banking licence, but also to split the money between the very best paying accounts to squeeze out as much interest as possible.

Current account best buy rates include up to 5% from TSB and Nationwide Building Society, but these rates are restricted to balances of pound;2,000 and pound;2,500 respectively. Alternatively, Santander offers 3% on its 123 current account on balance between pound;3,000 and pound;20,000, although this account has a pound;5 monthly fee. If you can afford to tie your money up for a certain period of time, fixed rate accounts are also well worth a look. Current savings best buys include Bank of Barodas account at 2.85% fixed for 5 years, or 1.90% fixed for one year. Savers who prefer to have their cash readily accessible are likely to prefer an easy access account, such as RCIs back which pays 1.45%.

Building a balanced saving portfolio may mean spreading your money between a range of accounts and terms to get the best return and fully protect your money, said Hannums. Although this can feel like an administrative headache, its simply the best and only way for complete peace of mind that your money is safe.
If you have pound;100,000 or more in savings, Savings Champion runs a lsquo;concierge service and will manage multiple accounts for you to get the best rates for your savings. There is an initial fee of 0.1% of the amount invested, and a quarterly management fee of 0.05%.

When choosing a savings account, you should also take into account how much tax youre likely to pay on your interest. Thanks to the introduction of the new Personal Savings Allowance in April, if you are a basic rate taxpayer, you can now receive up to pound;1,000 a year in savings income before you have to start paying tax on it.
Higher rate taxpayers have an allowance of pound;500 a year, while additional rate taxpayers arent eligible for an allowance. All savers also have an annual ISA allowance, which this year means you can save up to pound;15,240 into a cash, stocks and shares or innovative finance ISA, or a combination of these, and returns will be tax-free.

Reader offer

To get the best rates on your savings accounts, visit savingschampion.co.uk or call 0808 164 0223

Karen Telleen-Lawton: The Dismal Reality of American Personal Finance

Economists used to theorize that people smooth their consumption over their lifetimes, offsetting bad years with good ones by borrowing and saving. Recent research, however, has shown that when people get extra money like a bonus, tax refundor small inheritance, they are more likely to spend than save it.

Are adults nowadays naiuml;ve, optimistsor spendthrifts? A more nuanced look at recent history, documented by Neal Gabler in The Atlantics May 2016 issue, gives additional insight at two changes that dramatically affected savings rates.

In 1978 the Supreme Court ruled that state usury laws did not apply to nationally chartered banks doing business in those states. Usury laws limit credit card interest rates (among other things), so this rule allowed national banks to target vulnerable consumers with astronomical rates.

A generation of mild and rare recessions followed, so that the high risk of carrying debt was masked by relatively good times.

With these factors (and perhaps others) as background, the personal savings rates plunged from 13.3 percentin 1971 to 2.6 percent in 2005. It has since begun recovering somewhat, to 5.1 percentin 2015.

Median net worth likewise cratered in the 1980s through the early 2000s: over 85 percentfor those with incomes in the lowest quintile, and down over a quarter even for the middle earners.

By 2013, the bottom two income quintiles had virtually no net worth at all, according to Gabler. The middle quintile had enough savings to continue paying regular expenses for an measlysix days.

Even the highest earners,the top two-fifths, could continue paying their expenses for only 5.3 months if they lost their income. Edward Wolff, an NYU economist, declared the typical family to be in desperate straits.

Perhaps our indomitable American spirit helps perpetuate this disconnect between income and consumption. We assume well overcome adversity and that hard work will inevitably get us ahead. But no solution appears around the corner.

Real hourly wages peaked in 1972 and have been essentially flat since then, except for higher benefits. Inflation-adjusted income for the third, fourthand bottom income quintiles has risen less than 25 percentover a nearly fifty-year period! The top two quintile incomes have risen dramatically in that period.

Its obvious that we cant go on like this. Policy prescriptions would and will be all over the map, but the most important ones will be household policy changes.

We need to redefine success in ways other than consumption. Anyone for conversation or a game of cards?

Karen Telleen-Lawtons column is a melange of observations spanning sustainability from the environment to finance, economics and justice issues. She is a fee-only financial advisor (www.DecisivePath.com) and a freelance writer (www.CanyonVoices.com). Click here to read previous columns. The opinions expressed are her own.

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The wrong kind of savings

  • Business
  • Pensions
  • Social Security
  • United Kingdom

Many economists argue that low interest rates are the result of too much saving, rather than too little. A “savings glut” means that the returns from investing have inevitably fallen. Unfortunately, the savings aren’t really accumulating in the right places. The ageing citizens of the rich world should be putting lots of money aside for their old age, but personal savings rates are generally low.

Britain’s household-savings ratio perked up after the 2008 crisis, without ever reaching the 16.5% recorded in the last quarter of 1992. In the fourth quarter of 2015 it was 3.8%, well below the average level since 1963, of 10%. The American savings ratio is 5.4%; between 1963 and 1985, it often exceeded 10% (see chart).

In economic textbooks, companies use the savings of households to finance their expansion. But for much of this century companies in the developed world have been net savers. In Japan this has been going on even longer.

Given the ultra-low interest rates available on cash, and with investment-grade corporate bonds yielding just 3%, you might think there would be lots of profitable projects for companies to invest in. Although corporate investment has picked up since the 2008 crisis, it is hardly booming. Perhaps companies are cautious about the outlook for demand; perhaps competitive pressures are not what they were; perhaps they are simply using their cash to buy back shares. Whatever the reason, their behaviour has changed.

In theory, a financially strong corporate sector is good news for workers. Their employers could be putting aside a lot of money to meet their future pension commitments. In practice, however, the switch from final-salary pension schemes to defined-contribution (DC) plans means that employers’ pension contributions are lower than before. The average American employer ponied up just 4.5% of pay in 2013. Many people are going to depend on the state in their old age. As it is, more than a third of retired Americans get more than 90% of their income from Social Security.

If a country’s private sector has net savings, then mathematically the government must be running a deficit or the country must be exporting the excess, generating a current-account surplus. Deficit financing by governments makes sense as a way of stimulating demand in the short term. But it could be argued that rich countries with ageing populations should be running current-account surpluses and investing in faster-growing emerging markets. The euro area, in aggregate, does follow this approach (although Germany, its biggest economy, is often criticised for doing so), but Britain and America run persistent current-account deficits. Instead many countries in the emerging world, including China and Taiwan, are investing huge surpluses abroad. Although very low or negative rates in the developed world should discourage this, they seem to be having little effect.

Meanwhile, governments in the developed world face big long-term financial challenges. A recent report from Moody’s detailed the unfunded liabilities facing the American taxpayer: 75% of GDP for Social Security, 18% for Medicare, 20% for the cost of pensions for federal employees and another 20% for pensions in state and local government. Britain has unfunded pension liabilities (for government employees) of around 66% of GDP.

Perhaps governments will deal with those challenges by cutting benefits or raising taxes. But if workers think that will happen, they should be saving more now in order to compensate for that future hit to their incomes. There is no sign that they are doing so. Indeed, governments don’t want to see a huge rise in household saving in the short term because of the impact on demand. It’s the equivalent of St Augustine’s plea, “Lord, make me chaste, but not yet”. And it is another sign that economies are in a mess.

Economist.com/blogs/buttonwood