What happens when banks stop lending?

By Richard Alexander

WHEN the banks won’t lend to each other, let alone anyone else, you know there is something seriously wrong.

Yet despite this, interest rates remain low while short term savings rates and income tax are rising.

So, why is this happening and is there then a better alternative for savers?

As we all know, things have been far from positive lately.

While base lending rates may remain stubbornly low, the interbank lending rates have been steadily increasing to reflect the higher risk.

But banks need to borrow money to be able to lend to others to make their profits.

And when they cannot raise sufficient funds through the inter-banking system they have to look elsewhere and so turn to savers.

To attract more money from savers, they need to offer higher interest rates which is why in recent weeks short term savings rates have been on the increase but with minimum periods to attract the best rates.

After all, once the money is in, the bank cannot afford to allow it to leave again too quickly.

The taxman also loves it as his tax grab increases and in Spain, it is even worse, as rates of income tax have also gone up.

A bit of a vicious circle, for sure, but it is one you don’t need to join.

If you have savings you want to grow or perhaps to provide you with income, why give 21 per cent of it away in tax when you don’t have to?

Not only that, if the banks view each other as a bad risk, why would you want to lend to them?

‘Tax-wrapped investments’, which are fully compliant with Spanish and English law, enable tax to be deferred, with the amount of tax payable immediately ranging from very little to zero, so why don’t more people use them?

Probably because they don’t understand them or assume they are either high risk or high cost investments.

In fact, that is not the case.

These alternatives are available for savings from as little as 25,000 euros and can provide income with some paying returns of around five per cent a year.

The tax on growth is zero until money is paid back to you.

The amount of tax payable depends on the individual, but for most, if five per cent PA income is taken, the tax in Spain in year one will be less than one per cent.

Q If I return to the UK, will I have to cash in my tax-wrapped investment?
A No, it is recognised in the UK and will automatically benefit from UK tax concessions which will often improve the tax efficiency even further.

Q Can the investments be held in joint names?
A They can, and it is often preferable to do so as in the event of the death of one investor, the survivor can retain the investment for as long as they wish.

Richard Alexander’s company Financial Planning Limited is an appointed representative of L J Financial Planning Limited which is authorised and regulated by the Financial Services Authority in the UK. Contact him at Richard@ra-fp.com