How much are you earning on your savings accounts? If it’s not at least matching the rate of inflation you are, technically, losing value on that account. And with the Consumer Price Index (CPI) now at 1.8%, the vast majority are – indeed – no longer a guaranteed way to see your money grow.
Most savings accounts have managed to keep their nose ahead of inflation until the last few months, but all that is changing as price rises work their way into our shopping baskets. The slump in the pound’s value against the Euro following the Referendum has led to everything from Marmite through to mandarins costing more, while petrol has been hit by the fact that we buy our oil in dollars.
The upside of low interest rates over recent years has meant lower borrowing costs (albeit it has also served to fuel house price rises as mortgages have become more “affordable”). But for the vast army of savers in the UK, from those putting money away for their first home through to pensioners reliant on an income from their savings, the reciprocal reduction in savings returns has not been such great news.
According to a report in the Daily Telegraph, over the last year the number of inflation matching or beating accounts fell from 662 out of 837 (79pc) to just 23 out of 697 (3pc).
While most people hold money in a savings account because of the relative ease of access and the security, perhaps the time has now come for some to review just how much is kept in there as part of a balanced portfolio – especially if you can achieve higher returns elsewhere.
And those higher returns are out there. The price to be paid is inevitably higher risk and possibly less liquidity.
Starting with what most people consider the safest alternative, National Savings. Yields here range from 0.45% to 1% with the overall yield on Premium Bonds being 1.25% (although in this case you might just get nothing or win the jackpot). Children get the best deal with 2.5% yield on their bonds. All of these are tax free and would be additional to your ISA limits but, apart from children and Premium Bond winners, none will keep up with inflation right now.
Again at the safer end of the spectrum UK government bonds (Gilts) can yield up to 1.95% (taxable) for a 30 year bond. The catch is that if interest rates move up, the capital value of bonds generally falls so, unless held to maturity and bought for not more than face value, there could be a capital loss.
How about corporate bonds? They suffer the same risk of capital loss as interest rates rise and have the added risk of losses if the company’s ratings fall – or worse still, the company fails. At least company’s bonds usually rank ahead of its shares if the worst happens! Here, yields range from 34% for a short dated (September 2017) Co-op Bank bond to 2.3% for an HSBC bank bond with around 6 1/2 years to maturity and a BMW bond maturing in December 2018 with a 0.74% yield. “You pays your money and you takes your chances” as they say.
As a rule, yields rise with longer maturities at the moment as markets believe that interest rates will be higher in the longer term so it is wise to look at the ‘Yield to maturity’ as well as the headline yield.
Then there are company shares. Surely the highest risk sector of these options and one which demands a good understanding of a company’s finances and prospects as well as the wider market in which they operate. This category is also the first to be wiped out in a company failure. The range of returns here is vast, all dependent on the levels of risk. Royal Dutch Shell A shares will yield you over 7% in dividends whilst Barclays Bank will earn you just 1.9%. The value of shares is also unguaranteed and you may get less than what you paid for them if you need to cash-in.
Of course, a further option is to spread your investments, and therefore risk, by putting your money into one or more funds investing in a range of shares, bonds, commercial property and other investments. The options here are endless and the decisions need to be based on many factors so, whilst it is always wise to get advice before choosing your investment it is perhaps in this sector where it is most important.
After National Savings, the income and/or growth generated by the other investments may be subject to taxation, but can be held in an ISA so that the income and capital growth will both be tax free.
To see how each option would impact on your future finances register for one of the RetireEasy range of LifePlans and, if you want to have the ability to save and compare the different outcomes, opt for LifePlan Premium which will also give you live share, bond and fund values (provided by Morningstar) to keep your LifePlan automatically up to date.
