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Don't get beaten by low interest rates

View profile for Trey Vella
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Many people manage their cash savings in a way which is driven by simplicity and convenience. A large proportion of people will have a current account and any savings accounts with the same Bank or Building Society. Keeping your money in one place holds its own advantages and makes things easier. However, by doing this you could be missing out on better returns and tax efficiency.

Risk averse investors and those requiring immediate access to their money may be best suited to holding their funds in cash. This is also the usual route taken for those with little or no investment experience.  

Throughout periods of 2020 and continuing into this year, people have increased their savings in cash and savings accounts compared with many previous years. This may well be due to the national restrictions which have limited opportunities for us to spend our hard-earned cash.

According to the Bank of England, £12.3bn was invested into cash savings accounts in October 2020. This followed a £6.6bn increase in cash deposits in September 2020 and an average input of £17.4bn between March and June 2020. These figures make for particularly interesting reading considering Interest Rates are currently at an all-time low.

The Bank of England has held the base interest rate at a historic low of 0.1% due to the economic uncertainty surrounding COVID-19 and Brexit. This base rate is used as a guideline for Banks and Lenders when they decide what interest rates they will offer. 

The level of inflation in the UK is currently around 0.3% against a target of 2%. This highlights the potential for the value of cash-based savings to be eroded by inflation, effectively decreasing the value of your savings in real terms.

With this in mind, it could be beneficial to consider alternative options if you are looking to make your money work harder for you.

Stocks and Shares are often viewed as an alternative method for investment. Stocks and Shares can produce higher returns and offer a greater opportunity for growth but carry a higher degree of risk than standard cash-based investments. Stocks and Shares should also be viewed as a medium to long term investment, i.e. five years plus due to their volatility. Therefore, they will not be suitable for all circumstances.

Another option might include Structured Products- an investment which ties up your money for a set period of time and could provide growth, income or a combination of the two. There are two variations, Structured Deposit Plans and Structured Investment Plans. The former benefits from protection of the Financial Services Compensation Scheme (FSCS) so could be viewed as similar to a fixed rate account with a Bank or Building society but with the structure of an investment vehicle. Structured products can vary in risk and are often complex. Therefore, like Stocks and Shares Investments, professional advice would be recommended.

If you do want to stick to cash savings it is always recommended that you review your existing products regularly and check what else is on offer from other providers.  It can be a bit of extra work but could reap rewards if you are able to find more attractive products/rates elsewhere.

If you would like further information in relation to financial planning for your cash holdings or wish to discuss your financial arrangements in general, please contact me on 01206 217329 or trey.vella@birkettlong.co.uk

Don't get beaten by low interest rates

View profile for Trey Vella
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