If you’re only being paranoid if they’re not out to get you, Britain’s savers have plenty to worry about. After years of plummeting savings interest rates, and hot on the heels of a Financial Conduct Authority report warning of 0.00 per cent interest rates on a whole raft of big name instant and easy access savings accounts, comes the news that major players in the financial services industry are manoeuvring itself into a whole new world of negative interest rates. In other words, we could soon be paying for the privilege of having an account in credit.
So how can you stay one step ahead and keep your cash in positive territory? Here’s our guide to beating the minus numbers.
Nobody panic: savings accounts
There are two critical points to bear in mind here. The first is that not everyone thinks negative interest rates are a done deal for all.
“Whilst this clearly is a worrying move for all savers, at the moment there is no reason to think that it will come to fruition, especially for personal savings accounts - although clearly that can't be ruled out in the unlikely event that the base rate drops into negative territory,” says Anna Bowes of SavingsChampion.co.uk.
“Having said this, NatWest and many of the other big providers, in particular, do not offer good value to savers, both business and personal - so savers can find more elsewhere.”
And they do still exist, even for those who need to be able to get to their cash. Aldermore, for example, currently offers 1.1 per cent interest on its instant access savings account.
“And with a number of banks waiting in the wings for a banking licence, hopefully there will be more competition from these new providers, which will offer savers some respite,” adds Bowes.
There’s also that old chestnut the Premium Bond to think on. Though nobody ever seems to win a thing, the overall prize pool technically offers an equivalent rate of 1.25 per cent plus the added frisson that comes with even the most remote possibility of a big payday. Meanwhile, the Direct Saver, a unique deposit account that guarantees 100 per cent of your savings rather than the standard £75,000 cap, is currently paying 0.8 per cent.
“The Government will still want to maintain (and possible attract more) capital through mechanisms such at NS&I savings products like the Direct Saver Account and Premium Bonds,” says chartered financial planner Robin Melley of Matrix Capital. “It is of course a delicate balancing act, and there are political and market considerations for The Treasury. However, if you look at Premium Bonds for example, it is difficult to imagine a situation where they would create negative prizes. They may be a good safe alternative to cash deposits because even if NS&I reduced the prize pool further, it is unlikely to fall below zero.”
Think strategy: Bonds
The other important point to remember right now is that this is not the time to rip up any long term financial plans you may have been harbouring in a rush to shift every penny to something, anything, that offers a hope of beating the cost of living.
“The principles of sensible investing should still be observed and not abandoned in the search for decent interest rates,” says chartered financial planner Jaskarn Pawar. “Planning principles come first, returns come second. Look at what you can afford to put away and where the best place for that would be. Then make sure you generate the best return possible in each of your various savings pots.”
“If [you] are looking for something that’s a step up from cash in terms of returns and risk then short dated bond funds can work well,” he suggests, pointing to Dimensional’s Global Short Dated Bond fund, L&G’s Short Dated Sterling Bond fund, the Vanguard Short Dated UK Investment Grade Bond fund and Short Dated Global Bond fund.
The truth, though is that bonds aren’t really yielding very much either, while that old favourite buy-to-let - assuming you even have enough cash stashed to be able to access the market - is expensive, illiquid and not very tax efficient any more.
Embrace the risk: Investing in the stock market
“The stock market is pretty much the only game left in town,” says Laith Khalaf, senior analyst at Hargreaves Lansdown. “You do need to be able to stomach the ups and downs, but with a yield of 3.5 per cent, stocks look attractive relative to the competition. Whatever savings and investments you are squirreling away, it always makes sense to keep the taxman off them to maximise their value, so make sure you are making the most of your tax shelters.”
In a world of limited growth opportunities, income becomes the all important factor in securing a decent return. That, Khalaf suggests, points to an equity income fund like Artemis Income or Marlborough Multi Cap Income.
“The last month or so has also demonstrated the benefit of having a portfolio with internationally diversified revenue streams, so on that score its worth taking a look at Lindsell Train Global Equity,” he adds.
Storing wealth for dark days: the case for gold
“The prospect of negative interest rates is yet another sign that central banks are reaching the limits of what can be achieved through monetary policy,” warns Jason Hollands, MD for Business Development at Tilney Bestinvest. “It makes me nervous at a time when real economic growth is stalling, genuine business investment is weak and doubts are growing about the ability the ability of central banks to maintain stability.
“In this environment, investors might want to consider allocating a small portion of their investment portfolios to gold, for example via an exchange traded commodity such as ETFS Physical Gold.
“As a physical asset, you can’t just print more gold like central banks can expand the supply of paper money, so it has the capacity to provide a store of value when faith in paper money and central bank policies deteriorates. In an environment where interest rates are so low, or even negative, the opportunity cost of holding a non-yielding asset such as gold, is also very low.”
Savers 5 step action plan
1. Pay down debt
The cost of borrowing is almost certainly higher than the returns from your cash savings.
2. Shop around
Some closed accounts pay no interest and often significantly lower than open accounts. Shopping around and then switching should improve your returns and in some cases more than 10 fold. 80 per cent of people with easy access accounts haven’t switched over a 5 year period according to the Financial Conduct Authority (FCA) and yet this is often the best way to improve the returns on your cash. Cash ISA accounts can be switched to a new provider in 15 days or less.
3. Use your tax breaks
Fully use your personal allowance and the new personal savings allowance. Combine these and a basic rate taxpaying couple can receive £24,000 in income and interest this tax year, completely tax-free.
4. Use your ISA allowances
An ISA shelters interest from the taxman and this can improve your overall returns. Even with the new personal savings allowance, using your ISA allowance is good tax saving discipline. Certain types of ISA have other benefits: Help to Buy ISA provides a 25 per cent government bonus to first time buyers when they buy a property. From April 2017, Lifetime ISA will also provide a 25 per cent bonus to savers under 40 either to help first time buyers onto the property ladder or for longer term retirement savings.
5. Consider switching some long term savings from cash to the stock market
It’s important to hold some cash, but not too much. While income from a £10,000 cash deposit has fallen by 86 per cent since 1996, dividend income from a popular equity income fund has remained steady. However, when you factor in the growth in the capital value which in turn grows the dividends, the income has increased by 268 per cent (and the capital increased to £39,930).
Source: Hargreaves Lansdown
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