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For savers it has become known as the lost decade. While there had been some prospect of the Bank of England raising interest rates in the near future, the hope was dashed this week when inflation figures fell unexpectedly for June.
Also dashed were the hopes of savers that they would get something approaching a healthy return from their cash reserves. It was in July 2007 when the Bank of England last raised rates – they now languish at an all-time low of 0.25%.
“Savers may have felt that there was light at the end of the tunnel with recent talk of possible Bank of England rate rises, but realistically we are still well and truly in the tunnel,” says Damien Fahy from personal finance website MoneytotheMasses.
So what are the options for the frustrated saver – risk it all on the markets, or leave it in the bank to gain paltry returns?
Banking for the future
Inflation is at 2.6%, up from 0.3% before the Brexit referendum just over a year ago. Meanwhile, the best rate of interest available on an easy-access account is from Ulster Bank at 1.25%. The best five-year bond, from Paragon Bank, gives 2.45%, according to savingschampion.co.uk. In short, savers are in the red.
“Things are pretty dire for cash savers. Any significant rise in interest rates still looks some considerable way off and, to add insult to injury, inflation is rising, meaning cash in the bank is going backwards in terms of its spending power,” says Laith Khalaf of advisers Hargreaves Lansdown.
There is some respite in that challenger banks – new smaller entrants to the market – are offering better rates than many of the high street institutions (NatWest’s instant saver, for example, gives just 0.01%). “You have no need to sit and earn such appalling rates from the high street,” says Anna Bowes, director of savingschampion.co.uk.
But Nigel Yeo, partner at financial planners The Private Office, adds savers should ask themselves whether they necessarily need a higher return. “If it gets you what you want in life then maybe you are better off not jumping head first into riskier investments.”
Taking the plunge
If frustrated and willing to invest in areas outside of banks, cash savers are warned to tread carefully.
“It is an ongoing dilemma whether they should look to take more risks in the hope of getting better returns,” says Patrick Connolly of financial advisors Chase de Vere. “However, they need to be incredibly careful. The added difficulty now is that other asset classes – such as shares and fixed interest – have already performed well and are looking quite expensive. This means there is an added risk that cash savers who do take the plunge could move into these investments at exactly the wrong time.”
Financial advisers also warn not to leave all your money in one pot. “You will need to keep some cash, but beyond this look to hold money in equity income investment funds, in fixed interest and even in absolute return or property funds,” says Connolly. “You’ll need to get a good mix … nobody knows what the future holds so if you spread risks you are more likely to protect your capital and less likely to get any nasty surprises.”
Khalaf points to funds which offer some stock market investment but also include other assets. “A good example is Newton Real Return, which won’t shoot the lights out when the market is roaring away, but similarly won’t experience the same level of pain when markets take their occasional tumble,” he says.
Adrian Ash, head of research at gold broker BullionVault, agrees that the worst option would be to put too much money in one area. “Spreading your savings across a mix of cash, shares and other assets should help to control risk. Holding 10% gold, for instance, in a mix otherwise split 60:40 between the FTSE share index and government bonds, would have halved your losses in 2008, the worst year of the past four decades,” he says.
Taking a bigger jump
For those willing to take a bigger risk on the markets, time should be on their side. The longer they can hold the investment, the more likely it will be to ride through difficult patches. “The stock market is risky, but it becomes less risky the longer you invest,” advises Khalaf. “As an example, even if you invested £1,000 in June 2007 – on the eve of the financial crisis – you would still be sitting on more than £1,600 now. If you’re investing for the first time, consider a low-cost tracker fund like Legal & General UK Index.”
Darius McDermott of Chelsea Financial Services says investors need to be able to hold tight through rough periods. “For those taking a greater risk, you do need to be long-term investors. While markets have had a very strong performance since 2009, they can – and often do – go down for sometimes prolonged periods.
“If this happens, you must not panic and sell when you are losing money. You don’t actually lose money unless you sell,” he says.
Be careful of the short term
It may be tempting to look for a short-term gain at a time when there is so little offered to a cash saver – but it is a strategy rife with risk.
“They need to ask themselves whether they value the absolute security of cash savings so much they are willing to accept that the real value of their money, after the effects of inflation, is likely to continue falling,” says Connolly. “If you are only willing to tie up your money for a short period, certainly five years or less, then you should remain in cash and accept you may lose money in real terms.”
Fahy says that taking a risk in the short term should be avoided. “If savers find the interest rate hokey cokey frustrating, at least it hasn’t cost them money, which it might well have done had they taken on the investment risk,” he adds.
Basing an investment strategy on what happens with savings and interest rates is dangerous, according to Connolly. “The truth is that nobody knows. Many ‘experts’ have continually predicted interest rate rises since base rates were cut to 0.5% in March 2009.
“However, we have seen no rises at all since then and, indeed, rates have actually been cut and now stand at just 0.25%.”
BEING TAX SMART
Taking advantage of all of the available tax perks can see cash savers making gains without taking extra risk.
Nigel Yeo of The Private Office says that by using pension allowances, funding Isas and making sure that assets are held in the name of a husband or wife depending on their tax position, among other moves, can result in as much of a return as riskier investments.
“You can make a return just by being tax smart. Are you doing all of your tax stuff?Because that is effectively just enhancing the return” he says. “Because there is no one magic wand which does everything, you have to work through all of the basics.
“If you add it all up, all you are doing is enhancing the return but you are not taking more risk. How you hold it can be as important as what you put it back in.”
For instance, the Isa tax-free allowance is £20,000 for this financial year.