• Banks have set aside another £4.4bn in compensation
• Average payout is £1,700 per person
• Investing your windfall can give you £1,000 in 10 years
Laura Suter, personal finance analyst at investment platform AJ Bell, comments:
“The August deadline for PPI claims saw a flurry of activity as people rushed to claim their compensation. A total of £36.4bn has already been paid out to individuals over the past nine years, and the most recent financial statements from the banks show this is set to rise significantly. RBS, Barclays and HSBC have already allocated an additional £2.6bn to pay out in compensation in their latest trading updates and Lloyds completed the picture by setting aside an extra £1.8bn on Thursday last week. That’s an additional £4.4bn that’s due to be paid out by the big banks over the coming weeks.
“Each person who claimed so far has got an average payout of £1,700*, but some people are getting thousands of pounds in their windfall. So what should you do with this cash? It’s tempting to splurge it all on a holiday or a spendy treat. But with Christmas fast approaching and lots of people not having enough in savings, there could be better uses for the money.
“Firstly, people should pay off any pricey debt they have. On average each household has £2,608 of debt on their credit cards, with the average interest rate of 25% meaning many are paying large amounts just to pay the interest each month. You could use the windfall to wipe out any debt and go into 2020 debt free.
“You should also use the cash to bolster your savings. Almost half of the population have less than £2,000 in available cash**, so the windfall could be a welcome boost to your emergency fund. This will give you a cushion if an unexpected bill comes in, or if you lose your job, or just to bolster your savings for Christmas. The top easy-access savings account pays 1.45% at the moment, meaning you’ll only be getting £25 a year in interest. But you could put it into a regular savings account, paying up to 5% a year.
“Those with no debt and decent cash savings can make their PPI payout work for them and generate an extra £1,000 on the £1,700 in just 10 years. By investing the money in an ISA, and getting average returns of 5% a year after fees, the PPI windfall can quickly grow. After 10 years you’d have almost £2,800 while after 20 years you’d have £4,510.
“Alternatively if you’re focused on the long-term you could put the money into your pension, and get tax relief on top. The £1,700 turns into £2,040 with 20% tax relief, and after 25 years getting 5% return a year after fees, you’d be left with almost £7,000 in your pension. Higher-rate tax payers who claimed their extra 20% tax relief and paid it into the pension would have more than £8,000 after 25 years.”
* Financial Conduct Authority data.
** FCA data, one in eight UK adults have no cash savings at all, and a further third only have savings of between £1 and £1,999.
