Saving used to be the basis of all financial planning. Building up a reserve of cash in a savings account where it would earn interest could pay for holidays, for a car, even help build a deposit for a first home.
Things have changed. Since the economic crisis back in 2008, interest rates have been low, and the return on savings small.
When the Bank of England base rate was at 0.5%, banks and building societies were struggling to offer returns that kept pace with inflation, which at times passed the 3% mark.
Covid 19 has made everything worse. The reduction in the Bank of England Base Rate to an historic low of just 0.1% in March has seen returns cut even further. The yields on accounts already paying historically low rates of interest have fallen even further.
For example, the average easy-access ISA paid 0.81% in January. This was less than exciting, but the rate now averages at just 0.37% – a fall of more than half. The average one year bond account paid 1.2% at the start of the year, but now pays out just 0.71%.
It might be a lifeline for borrowers, from homebuyers to businesses – but it means that savers will be paying the price.
Inflation is still the enemy
Low interest rates are seen by the Chancellor of the Exchequer as vital for a post-Covid recovery. But they are so low the little interest your cash on deposit earns is likely to be eaten up by inflation.
Inflation fell for a while in recent months, but the consumer prices index more than doubled to 0.7% in September after restaurant prices rose following the end of the Government’s Eat Out to Help Scheme. Few savings accounts can match that level, and none of those from Britain’s biggest high street banks.
It means saving is likely to actually cost you money. Things could soon get even worse, if as has been hinted, the Bank of England Base Rate goes negative, which could mean savers must pay the bank for looking after their money.
There is plenty of money to save
With no spending on travel to work and evenings out becoming problematic, many people have seen their expenditure shrink dramatically. A report by the think tank Centre for Economics and Business Research found that savers put aside a record amount from April to June, as coronavirus cut household spending. In total, £75.5bn will be saved in the second quarter of 2020.
Many people have been able to save record sums during lockdown, but the low interest rates offered by banks mean that they are finding it hard to benefit from this extra cash.
So, what can you do with your saved cash?
The position does not look as though it will improve soon. Savings account providers are awash with cash and don’t need to attract more deposits.
If you are looking for a decent return a notice account could be one answer. You may be able to get inflation beating returns with some at the moment, but if inflation rises, even they will have difficulty keeping up. You might also be wary of locking your money away over the next few months, which still look uncertain.
The basic message is that currently your savings can no longer be relied on to grow or even to provide much of an income for you. The solution – especially if you depend on income from your savings – may be to think about investments.
With savings, your money stays as cash. With investment, it is used to buy an asset – i.e from a buy-to-let property to shares in a business or shares in a fund which will invest in shares on your behalf.
It will mean an element of risk. An investment can fall as well as rise in value and does not have the same security of the government’s FSCS compensation scheme, which provides up to £85,000 for each bank account held.
But on the other hand, investments are not entirely limited by interest rates – which means that your money could start generating the return you want again.
At Continuum we are helping many hundreds of savers become investors with investment products like ISAs, with generally predictable returns and manageable risks.
We can even make investing as simple as saving, with investment funds that you can pay into each month.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
Equity investments do not afford the same capital security as deposit accounts.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
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