Cash Savings Alternatives?11 August 2016
We are having a busy August (which traditionally for deep summer is slightly unusual). Many held their breath over the early summer to see the result of the EU Referendum and then spent some weeks taking stock, with some significant reaction in financial markets. Equity markets in the UK have mainly risen, sterling and gilt yields have fallen and, in early August, the Bank of England reacted.
In part, this busy summer period for the UK has been fuelled by the fall in Bank base rates to 0.25%, with the possibility of it dropping to nil in future months. We have also seen new quantitative easing measures being introduced, and I would expect these to be extended, although this is not guaranteed.
I am not convinced it is the 'headline' base rate fall that has prompted enquirers to make contact as to what to do with their secure cash, but the greater fear that this low interest return environment now seems to be becoming entrenched and will probably endure.
We have always advocated that clients maintain a readily accessible fund of about 3-6 months' income to cover emergencies or opportunities. With many deposit rates now below 1.0% gross pa AER, we still like the tax efficient opportunity that Premium Bonds afford.
The advantage of cash and cash type savings, such as Premium Bonds, is that they are secure within the limits of the plan for Premium Bonds (£50,000 max per individual) and within the Deposit Protection Limit of £75,000. Cash ISAs have also been one opportunity, with this year's limit being £15,240, although we have seen returns on these types of investment fall in recent times. But the cost of security is often poor returns and when inflation is taken into account, even the possibility of negative returns over time. The new tax change allowing the first £1,000 of taxable deposit interest in this tax year (2016/2017) to be tax free for basic rate taxpayers is helpful, but it still only offsets what are usually poor deposit rates.
The potential to increase returns elsewhere invariably imports risk and volatility to capital values and a good example of this is demonstrated below:
(Source: Financial Analytics/Cormorant Capital Strategies Limited)
- Low Risk - 25% FTSE 100 Index/75% FTSE Gilts (5-15) Index lost 5.1% between December 2007 and October 2008
There is no reason to believe that losses like these will not happen again, or indeed be even higher.
Past performance is not a guarantee of future performance. Fund values and the income they generate can fall as well as rise and are not guaranteed.
Some enquirers have also found our Investment Risk Scale useful in considering investment alternatives and this can be found here:
However, a balanced low risk portfolio of diversified assets can provide the opportunity and potential for improved returns, although this is not guaranteed, and it is good to see many individuals focussing on their financial planning, the future of their income, and taking positive action.
The new tax change of allowing the first £5,000 gross of dividend income in a tax year to be paid without deduction of tax is very helpful for those seeking improved returns, and also the increased ISA allowance of £20,000 in 2017/2018 could play its part in an income creation strategy.
As always with our blogs, no individual advice is provided during the course of this blog. If you would like to review your savings and investment arrangements then please contact the team at either our Guildford or Woking offices.
Keith Churchouse FPFS
Chartered Financial Planner
CFP Chartered FCSI
Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.