Remember when the Santander 1,2,3 account launched? The ‘3’ stood for 3% interest (on savings of up to £20,000) … a very good low risk return. That’s not to be mistaken for “no risk” as every investment decision carries some risk, and for cash that comes in the form of inflation risk – that the buying power of your money erodes over time – but it was still pretty good nonetheless.
Fast forward to today, and it’s pretty hard to find any savings account offering 1%. Moreover, most of those that look good, don’t stay good for very long, as the interest rates are gradually reduced at the bewilderment of customers. My personal Cash ISA with Lloyds Bank (other high-street banks are available) now pays 0.05%, and that isn’t unusual these days.
A frequent haven for customers looking to get a slightly better return on high street accounts has been NS&I, the government backed savings organisation. They are mostly known for “Premium Bonds”, though also offer a range of instant access and fixed term deposit schemes. Up until now they’ve been one of the few places left offering better interest rates than the high-street banks and building societies, but that is unfortunately changing as well.
NS&I recently announced that from November, interest rates on most of their products will be slashed. Using their Direct Saver as an example, the rate will move from 1% AER to 0.15% AER, an 85% reduction. The changes are even more dramatic in their popular Income Bonds product, which will go from paying 1.16% AER to 0.01%! Premium bonds won’t even be left alone, as the odds of every £1 of premium bonds winning any prize will fall from 1 in 24,500 to 1 in 34,500. In more simple terms, the equivalent interest rate of the average person is falling from 1.4% to 1%, so you might have to count a bit more on luck from now on…
Where does this leave those wanting a safe place for their savings? Well it might seem like a difficult place, but it doesn’t need to be. Often, by reappraising your financial objectives, and budgeting for future expenditure you can make your money work harder for you, without taking a huge amount of extra risk.
Absolutely we would advocate holding a good cash buffer… something you are comfortable with in case of a rainy day. We’d also recommend keeping an amount equal to any one-off expenditures you have on the horizon, to keep those secure. But above and beyond that, consider investing more of your asset base.
Coming back to what I said at the start, every investment decision carries some form of risk. Cash deposit accounts are often seen as risk-free, but they aren’t. In fact, with interest rates so low, and inflation all-but sure to be above them, the risk that the buying power of your money will fall is pretty high. Investment portfolios can protect against this risk, and have a much greater potential for higher returns.
Our Very Low Risk Portfolio, the most cautious available, aims for 2-4% per annum, on average 3x better than any savings account available. Yes you have to accept it may move up and down more than savings, and there is a chance you could lose money as well as gain, but that’s why you should never invest anything you need in the short term. Keep that money safe and accept its return to be next to nothing. Then with anything you don’t need for some time, consider giving it a greater potential to out-run inflation.
As with any financial decision, there isn’t any one solution that’s right for everyone, but definitely talk to us if you’re holding a large cash weighting and want that money to work harder for you. We are in the middle of a recession, meaning future investment returns should be good from here. Cash will still have its place, but just as with the premium bond draw, it’s also important not to rely on it too heavily.