10th May 2013
The Bank of England held interest rates at a record low of 0.5% for the fiftieth consecutive month this week and with little sign of a rise on the way any time soon savers are continuing to feel the bite writes Philip Scott.
While low rates are welcomed by borrowers, they spell gloom for the UK’s savers. Some experts have noted the recent stock market rallies in the UK and US, may not just be inspired by better economic data but also they may in part be a result of desperate savers diving in, in a bid to boost their income from their cash. In the UK, the FTSE 100 index broke through the 6,600 barrier for the first time in more than five years on 10 May.
Adrian Lowcock, senior investment manager at fund broker Hargreaves Lansdown says: “Low interest rates, combined with the effects of the funding for lending programme, are really starting to impact on options open to savers.”
We examine a number of issue consumers need to examine and tackle in a bid to get the most from their cash.
Review existing savings accounts
Just because savings rates are in the doldrums, savers should not let apathy stop them from shopping around for the best deals available. Sue Hannums of Savingschampion.co.uk says: “It is essential that everyone keeps at least some money in cash based accounts for emergencies, therefore everyone should have a savings accounts. As important as it is to build a lump sum, choosing the right account is vital. Picking the wrong one can cost you dearly as interest rates remain at record low levels with some so called savings accounts paying less than you would get in some current accounts.”
Of the easy access accounts available, Hannums rates the West Bromwich Building Society Brach Easy Access Saver 3, which pays 1.80%, in regards to fixed rate bonds the Shawbrook pay 2.55% but savers will need to lock their cash away for four years. In terms of regular savings accounts, she recommends the Marks & Spencer Monthly Saver which pays 6%.
Tackle debts as soon as possible
According to the charity group Credit Action,the outstanding personal debt in the UK stands at an eye-watering £1.424 trillion up from £1.408 trillion last year. Lowcock says: “If your savings are earning less interest than you are being charged on borrowings, paying down debt first will be more cost effective.” It makes sense to switch any heavy credit card debt to an interest free deal and to consolidate debts overall, to make repayments more manageable. For individuals looking for advice on debt issues, there are many free debt-counselling services, such as the Citizens Advice Bureau and the National Debtline.
Use your Isa allowance
An Individual Savings Account (Isa) is a tax-efficient savings and investment wrapper which shields savers interest and income earned from their cash from HMRC. There are two types of Isa; cash or investment. Savers can put up to £5,760 into a cash ISA before 5 April 2014 or shelter up to £11,520 in an investment Isa. In the case of the latter type, consumers can invest in shares, funds, bonds or commercial property, or indeed a mixture of these.
Savers can split their savings between a cash and investment ISA. With regards to the cash Isas on the market, Hannums cites the Nationwide Flexclusive Isa, which pays 2.5%. While interest rates are so low cash no longer protects investors from the impact of inflation and to beat this, individuals could can diversify into other assets such as bonds and equities which provide a more attractive yield although with more risks.For those seeking out the investment route discount brokers such as Hargreaves Lansdown have an online“fund supermarket” which allows investors to choose from a huge variety of fund options. Investing, of course, comes with risk, and you may not get back the amount you invested. With regards to potential funds, equity income portfolios are hugely popular among UK retail investors. Lowcock says: “Over the longer term equities tend to outperform other asset class, however they can be more volatile. A long term strategy which will reward patient investors and help those looking for alternative income streams is equity income. Fund managers who invest in this sector are looking for companies which are able to pay a good and rising dividend. This often demonstrates a strong financial well being because dividends are paid out of earnings. Managers often sell out of a company when the valuation rises too far.”
Lowcock tips the JO Hambro UK Equity Income fund which has a yield of 4.2%. For savers wanting to avoid stock markets but want to beat cash, they could go for a bond fund. While the interest yields on bonds have fallen in recent years the asset class will continue to be attractive to investors whilst cash rates remain low and do not even beat inflation. “Strategic bond funds offer investors access to the whole market and allow the managers the greatest flexibility to identify opportunities and maximise both income and growth,” says Lowcock, who rates the Jupiter Strategic Bondfund which carries a historic yield of 5.4%.
Investors could consider capital preservation or absolute return funds. Absolute return funds are meant to, in theory at least, deliver positive returns to investors no matter what market conditions are like. If markets are rising swiftly, they are unlikely to keep up but equally if markets are falling, they should protect investors from the downside but they can and do fall in value at times and should not be absolutely relied upon as a cash substitute. Lowcock highlights the Newton Real Return or Standard Life Investments GARS funds.