How to make your nest egg work harder
Prevent your savings languishing in a low interest account and switch to a better deal, says Annie Shaw
Tuesday 25 January 2011
Savers have never had it so bad. Interest rates are at record lows while inflation is rising, leaving those who depend on savings to supplement their income, such as pensioners, particularly worse off. Last week, the Office for National Statistics identified another rise in the retail prices index (RPI) to 4.8 per cent, which only adds to the gloom. Yet it tends to be forgotten that the banking crisis actually helped some people to become savers. Mortgage interest rates have plummeted, leaving many households with cash to spare each month.
Research by Sainsbury's found that by the end of 2010, mortgage interest costs were on average 28 per cent lower than in October 2008. While this situation surely won't last if the Bank of England raises rates to try to quell inflation, many mortgage borrowers have been using their spare cash to pay down other debts, while others have been able to put cash aside. Then there are the forced savers such as would-be first-time buyers, who have no option but to save for a deposit on a home now that 100 per cent mortgages have all but vanished from the market.
Research just published by HSBC suggests that, despite the comparatively poor returns available in the savings market, most of those it surveyed intended to save at least as much in 2011 as they did last year. The biggest groups of would-be savers were 18- to 24-year-olds, closely followed by 25- to 34-year-olds, more than half of whom are pledging to save more, despite the pressures of restricted employment opportunities, the cost of education and overhanging debt.
Richard Brown, head of savings at HSBC, says: "It's encouraging to see that intentions to save for the coming year are positive, with many planning to set aside more money in their savings pots. With a tough outlook for the year ahead, and based on their performance last year, however, it will remain to be seen whether these noble intentions materialise."
The hard part is deciding where the best place is to keep your cash. There are basically two choices and which one you opt for depends on your objectives, how you feel about putting your money at risk for potentially better returns, and how long the money can be tied up. Patrick Connolly, a spokesman for the financial adviser AWD Chase de Vere, says: "Either investors must accept less income or they must take more risk."
If you need an account that guarantees the security of your capital, or you are saving for the short term, for an occasion such as a wedding, a holiday or new furniture, or you need easy access to your money in case of emergencies, you will be restricted to some sort of cash deposit account.
If you are prepared to risk at least some of your investment in exchange for the chance of higher rewards and you can tie up your money for a longer period, then you are more likely to opt for stock market investment via funds or individual shares, investments in commodities, currency, property or some sort of proprietary investment product that embraces some or all of these.
In any case, you should spread your savings around in different types of assets according to your risk profile, and never put all your eggs in one basket.
Anyone without a generous company pension scheme will no doubt also be considering long-term savings for their retirement, which has been propelled to the top of the news agenda as the Government announces its reforms of the state retirement pension. While retirement planning can involve many investment and saving options, including buying property to rent out, investing in gold, or more optimistic strategies, such as winning the lottery, most people saving for their retirement over the long term will be putting something aside each month into a stock market-based scheme that involves at least some element of risk.
Inflation is the great unknown for anyone trying to devise a savings strategy, says Andrew Hagger, spokesman for the comparison website Moneynet.co.uk: "The double whammy of ultra-low interest rates and stubbornly high inflation is making it virtually impossible for savers to get a real return on their cash without locking it away for three years or more.
"With the consumer prices index (CPI) now at 3.7 per cent, and RPI even higher, a basic-rate tax payer needs to earn 4.625 per cent gross on their savings to maintain their spending power, while a high rate tax payer needs a gross savings rate of 6.17 per cent."
This simply can't be done with a savings product, meaning that the spending power of saver's cash is diminishing each day in real terms.
Research by the consumer magazine Which? Money found that nearly nine out of 10 savings accounts that were available six years ago are now paying interest of 0.5 per cent or less, while almost two-thirds are paying 0.1 per cent or less – just £1 a year for every £1,000 saved.
At the same time, more than a third of savers have left their money languishing in a savings account that they opened six years ago or more, despite the pitiful rates of interest. An astonishing 40 per cent said that they had no plans to switch accounts in the future, because they believed that all savings interest rates are "pretty much the same".
However, Which? says this is simply not the case, and that switching accounts can be rewarding. It found that, if every saver who put their money in an instant access or ISA account paying a typical 0.5 per cent invested their money in an equivalent best-buy account instead, they could collectively gain £12 billion a year, equivalent to £322 each.
The key to getting the best rate is to keep an eye on what you are currently getting and to be nimble on your feet, ready to switch if a better deal becomes available.
Investors similarly need to adopt the same principle and stay vigilant to ensure that their investment objectives are still on target. Research by JP Morgan Asset Management found that more than one in 10 investors review their core investment holdings only once a year, while one third who opted for a risk-based investment get cold feet and actually hold their portfolio in cash. David Barron, head of investment trusts at the company, says: "It is wise to hold a cash cushion for emergencies, but investors who regard cash as a core asset should be aware that other asset classes can make their money work harder for them. Diversification should be a key part of a private investor's portfolio of core holdings and, as such, this means regularly reviewing what they're investing in."
What does the future hold?
Hagger says: "The sixty-four million dollar question is: when will rates start to increase? Expert opinion seems to be divided. I think we may see a couple of small rate rises before the end of 2011."
He warns that even if rates go up we shouldn't expect savings rates to increase by the same amount. "Don't expect banks to pass on any rate increases in full, as this will be the first time in over two years that they will have an opportunity to claw back some of their profit margin," he says.
He also warns savers not to fix rates for too long, or they could find themselves trapped in uncompetitive products.
How to find the best deal
Check out the rate
It’s easy to lose track of interest rates. Make sure you know what you’re getting, particularly on old accounts. If it’s fixed or has a bonus, make a note of the date it ends and be ready to switch to a better rate right away.
When your fixed rate ends, your provider may write to you offering you a range of other accounts. Don’t feel you have to pick one of them. Check out the competition too.
Use your tax breaks
Make sure you use your annual individual savings account (ISA) allowance. You can put up to £10,200 per tax-year into an ISA, of which £5,100 can be held in cash (or £10,680 and £5,340 respectively from 6 April 2011).
If you can put money aside each month, choose a regular saver account, as they tend to pay more interest. Among the current best buys are First Direct, which pays 8 per cent fixed for 12 months for between £25 and £300 per month, while Norwich and Peterborough Building Society pays 4 per cent fixed for 12 months for £1 to £250 per month, and Saffron Building Society is offering 4 per cent gross fixed for 12 months for £10 to £200 a month.
If you’re saving for a child, take advantage of higher rates often available on accounts for young people. Bath Building Society’s Futurebuilder account pays 5 per cent on the first £500, and Santander’s Youth Plus account pays the same rate. Halifax has a regular saver account for children paying 6 per cent fixed for a year. If the child is not a taxpayer – and most usually aren’t – complete form R85 to have interest paid without tax taken off.
If you might need to get at your money at short notice, best buy accounts include 2.9 per cent from the Post Office, which includes a 1.25 per cent bonus, and 2.75 per cent from Santander, which includes a 2.25 per cent bonus. Both bonuses apply over 12 months.
The limit to savings |protection covered by the Financial Services Compensation Scheme has risen since the beginning of this year to £85,000 for each depositor in |each separately authorised financial institution.
02 March 2015 10:50 AM
The DWP and the FCA have joined forces to investigate transaction charges in occupational pension schemes
04 March 2015 03:00 PM
The company was found to have unacceptably long call waiting times
27 February 2015 07:30 PM
27 February 2015 07:30 PM
27 February 2015 12:01 AM
The NHS is currently bearing a yearly burden of approximately £1.5bn treating cold-related illnesses every winter
26 February 2015 04:17 PM
Hundreds of thousands of people's policies were hit when the mutual insurer almost collapsed at the turn of the century
27 February 2015 12:01 AM
The Department for Work and Pensions has been slammed after a series of cock-ups left an elderly pensioner £26,000 worse off.
24 February 2015 08:57 AM
A 20-month investigation concluded that a lack of price competition between lenders has led to higher costs for borrowers
23 February 2015 04:02 PM
The Financial Conduct Authority said the industry needs to start thinking about solutions to these challenges
20 February 2015 08:00 PM
In 1999 stock markets quickly tumbled, losing many a fortune in the process
20 February 2015 08:00 PM
13 February 2015 08:00 PM
Scottish Power hit with sales ban by regulator
There are 'dark corners' of the investment and pensions industry, says Pensions Minister
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
Weekly Money: round-up of the personal finance stories you may have missed 2 to 6 March
Midweek Money: The end (of the tax year) is nigh: act now
- 1 Tourist films plane's descent just metres above packed Caribbean beach
- 2 Indian woman creates 'Marriage CV' after parents put her on dating site: 'Definitely not marriage material. Won’t grow long hair, ever'
- 3 World Book Day: Boy 'excluded' from school after dressing up as Fifty Shades' Christian Grey
- 4 Bad Jews poster 'censored' on London Tube
- 5 Have sex with your iPad thanks to the new sex toy no-one asked for
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
Durham Free School: 'Creationism taught at' free school facing closure
End of the licence fee: BBC to back radical overhaul of how it is funded
Elif Shafak: Turkish author warns against rise of British nationalism
Most people think legal tax avoidance is just as wrong as illegal tax evasion, poll suggests
Nigel Farage promises Ukip will not 'stigmatise' would-be migrants – and says he wants 'everyone to speak the same language'
iJobs Money & Business
£13000 per annum: Recruitment Genius: This is an exciting opportunity to join ...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
£12 - £15 Hourly Rate: Jemma Gent: In this role you will report to the Head of...
£8 per hour: Recruitment Genius: This Pension Specialist was established early...
Day In a Page
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads