Seven years of low interest rates has been a painful grind for many cash savers who used to rely on the interest paid to provide an income. Last week’s announcement that interest rates have been cut by 0.25% and the possibility of rates dropping further if the economy worsens, will have left many savers feeling uncertain.
It is not hard to see why. In the past, holding money in a cash savings account was a reliable way to generate an income. In January 1990 the Bank of England base rate was nearly 15%, in January 2000 it was 5.75% and by 2009 it had dropped to just 0.5%. Today it is now at its lowest at 0.25%. The base rate determines the rates of interest paid to savers as well as that charged to borrowers, so whilst in the past holding large sums in a savings account may have made sense, in light of the low interest rates today, doing this without considering the alternatives may be short sighted.
Many people think that holding money in cash is risk free. What they are forgetting however is the impact inflation has on their savings. In simple terms inflation measures the change in purchasing a set basket of goods. If the cost of this basket of goods increases at a greater rate than the returns on your savings, the result is effectively that the value of your savings has decreased. As of July 2016 the current rate of inflation (CPI) is 0.5%. So in order for your savings to grow in real terms, this is the rate you need to beat.
So what are the alternatives?
The alternatives are mostly investment based. This means putting some of the money into stock market linked, or as they are sometimes called, asset backed investments.
Many people who have only held cash savings can feel nervous about the idea of doing this, concerned that they will lose their money What they may not have considered is that there are a range of different investment types available and these can require the investor to take differing amounts of risk with their money.
Risk and reward go hand in hand; Some investments take a high level of risk which may result in significant losses or significant gains. Others take a more cautious approach and are more likely provide lower returns, but any losses incurred may also be more tolerable. The key to moving your money away from cash savings in search of better returns is to speak to a financial planner. They can help you to build a portfolio of investments which meet your needs, whilst only taking the investment risk that you feel comfortable with.
A financial planner will also take account of the timeframe over which you may consider investing; time is very relevant in terms of the amount of risk you feel prepared to take; stock market linked investments are volatile, some more so than others, and when values fall they often rise again at some point. If the timeframe you plan for your investment is short, there may be little or no time to make up any losses which may have occurred; a longer term means the likelihood is that your investments will start to grow once more. This means that some investors feel they can take a little more risk for a longer-term investment.
Or it may be that over a shorter term, any fees associated with a new investment would not be recouped over the timeframe, meaning that investment is not appropriate.
So, time and your risk tolerance can determine which investment products you choose. Often those who are looking for a very cautious introduction to investing can choose to put some of their cash into products like gilts. Gilts are bonds offered by HM Treasury on behalf of the Government which offer a fixed return after a set amount of time, as well as an interest paid whilst you hold the investment. As gilts are government backed, they are often considered as a lower risk investment class. There are also guaranteed investments which, as the name suggests, guarantee the return of the capital you invested; however, returns are often lower than other investments because of these built in reassurances.
The good news for first time investors is that you don’t have to hold all of your money in investments; in fact, it is better to hold a proportion in cash savings too. Your financial planner will help you to work out how much money you need short-term access to, how much can be invested over the medium term (five to ten years) and the amount that you are unlikely to need to access for the long term. Your money can then be appropriately invested based on your individual needs and the chosen time frame.
What is important is to consider the facts.
Mark Carney, Governor of the Bank of England has said that rates could go lower if the economy worsens*. With this is mind, if you have savings which need to provide an income or if you are not expecting to need to access the money for at least five years, considering the investment options which are available could be a sensible financial planning approach.
To speak to a financial planner at Genesis Wealth Creation about investing for income, or to look at the options for an investment portfolio to suit your circumstancesplease get in touch. firstname.lastname@example.org
Please remember any views or facts expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. None of the information should be regarded as advice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. Any tax treatment is dependent upon individual client circumstances and may be subject to change.