How to earn more money from your nest-egg savings

Britons are overdosing on cash savings, which aren't always safe and offer meagre returns. Diversify, says Simon Read

Our nest-eggs won’t amount to as much as we would like if we put all our money in cash accounts. ‘British savers,’ says one fund manager, ‘are a very conservative bunch’ (EPA)

Do you keep most of your nest-egg in cash savings? New research suggests Britons are overdoing the safety-first approach in growing their rainy-day money.

Money experts reckon you should keep at least three months' disposable income in cash accounts, and it would be wise to keep, say, an additional cash fund of £2,500 for emergencies. If we all did that, it would mean a total of £299bn in cash savings across the UK.

The actual amount at the end of October 2015 – according to analysis of data from the Office for National Statistics, the Financial Conduct Authority and the Bank of England – was £746bn saved in cash.

That suggests £447bn is being kept in safety-first cash accounts, with £376bn held in instant access accounts, on which the average interest rate was just 0.39 per cent, Frankly, most people want better returns than that.

Henderson Global Investors, which put the research together, reckons that if that £447bn were invested in a mix of UK and international equities, savers would earn an additional £10.6bn in income every year on top of the savings interest they are currently receiving. In other words, we're missing out.

"British savers are a very conservative bunch, falling back on cash savings because they perceive them to be safer, despite cash abjectly failing to meet their own stated investment aims," says Henderson's James de Sausmarez.

"Cash deceives investors with the illusion of safety, but inflation has exceeded cash interest rates for eight years in every ten, and eats away at its value."

Patrick Connolly at the adviser Chase de Vere points out that cash savers have been losing out for years, ever since returns shrank when the base rate fell to 0.5 per cent in March 2009. "For many people, a better option is investing in stocks and shares, utilising tax-efficient Isa and pension wrappers," he says.

The best approach is to diversify, believes Adrian Lowcock of Axa Wealth. "By investing [in equities], you can increase the chance of growing the value of your savings, and reduce the risk of high inflation in the future not allowing you to achieve your goals," he says.

Only a fifth of UK adults have some form of investment, compared with nearly 60 per cent in the US, reports Danny Cox of the adviser Hargreaves Lansdown. And even though last tax year an extra £20bn was saved into Isas, it was mainly in cash and the amount allocated to equity Isas actually fell.

"Savers should consider taking a longer-term view with some of their money, as the stock market should provide a greater income and capital return," Mr Cox says.

There are many reasons why there's been a shift from equity investment to cash savings. Market turmoil has put off many, says Brian Dennehy of FundExpert.co.uk, citing the bursting of the tech bubble, a variety of scandals, over-regulation and, "on the face of it, a stock market which has gone sideways".

He believes better information must be made available to savers about their options and the dangers of leaving too much of a nest-egg in cash. "What we don't need is more political interference, whether with new populist products or privatisations. What we do need is a better-educated and better-informed public – and that's a huge job which is not being tackled."

The fund management industry must help, says Mr de Sausmarez. "It is up to us to help inform savers how the products we offer, like investment trusts, are far more suited to their investment objectives."