The Growing Need To Manage Your Savings
02 October 2012 / by Oliver Roylance-Smith
The need to consider your savings in the context of something that requires managing is a growing need in the UK savings space. We take a look at what this could mean for you and offer some ideas as to how you might organise your savings to try and make the most of what the market has to offer.
The economic environment is extremely difficult for savers. Interest rates continue at their record lows and this has resulted in highly unfavourable savings rates. This is also compounded by other factors, including the major deposit takers being able to secure money cheaper than going to the high street or the internet.
So not only are interest rates low, but there is also less competition from the major banks, which has resulted in lower rates across all of the main deposit accounts from instant access to longer term fixed rate bonds.
Needs haven’t changed
But this is just the savings landscape from a provider perspective. The needs of the average saver, on the other hand, have not only changed but have in fact got worse. With more accounts on offer that do not beat inflation than those that do, the climate is a challenge.
Add to this the bleak outlook for interest rates and the potential for increasing inflationary pressures, and the ability to provide a real return (i.e. after tax and inflation) year-on-year seems a genuine concern for all in the foreseeable future.
Even committing for the longer term does not guarantee a higher rate, or at least a rate where you feel you are being adequately rewarded for committing your capital. The market for longer term fixed rates is at one of its lowest points.
Only time will tell
All of the bad economic data continues to flow, with prosperity and the prospect of change rarely featuring on the radar. The intricacies of how the economy will be shaped in the future are too complex for this article, but needless to say there has been a massive sea change in the last five years and the timeframe needed to turn this around is not a short one.
Individuals have also become more risk averse, seeing huge chunks of their investments wiped away, high investment charges and a lack of faith in much of the advisory landscape. Although work is being done in all of these areas, there are changing needs to be met and the search for value for money and a good deal for all concerned is greater than ever.
A focus on cash
One of the major impacts of recent events has been the increase in the importance of cash within our overall finances. Unfortunately, this has come at a time of record low interest rates and historically low rates on savings – gone are the days when we could get 7% from a retail bank.
Margins are tighter, banks are more aware of making profit and the entire retail money market is evolving. With there being such a wide number of providers in the market, as well as innovation and continuous new developments in the world of savings, it is vital that we review all of our options carefully.
Where to start
With this in mind, the need to manage our cash is now more important than ever. Shopping around for the best deal, making sure we understand all of the options available, as well as maximising any tax allowances should all be considered. Equally important is the part that tax and inflation can play, so fully understanding what might happen in the future and the potential impact this may have on our net return is critical.
The main types of account to consider when managing your cash portfolio are instant access, notice accounts, fixed rate bonds and structured deposits; this order is loosely based on the length of time required to consider each, although there is some overlap.
Deciding when we need access to our cash
The first place to start is to decide when you will need access to the capital. As a guide, generally the longer period you can commit your money for, the better the rate or potential return on offer. Having said that, this is a rather challenging time in the history of retail cash rates and much of what has happened in the past is changing.
For example, the market for longer term fixed rates is at one of its lowest points, as many of the banks have access to government funding and so do not need to pay more by asking the consumer – so there is little premium from fixed rates for tying up your money for longer.
However, the level of access required remains an important feature and, depending on your needs, may allow you to divide your savings into different pots.
Consider all of our options
Money that you may need without notice is covered by the instant access account. This is generally rate-driven but look out for how many withdrawals you can make without penalty and remember to make a note of what any bonus is and, most importantly, when it comes to an end.
A wider range of accounts without a bonus has developed recently which is attractive for those who know that they might not remember to switch accounts when the bonus comes to an end.
The middle ground
Notice accounts have grown in popularity recently, as savers start to see the added flexibility of having a withdrawal period of less than a year but also want to benefit from a higher rate than might be available from an instant access account.
Notice accounts therefore bridge the gap between instant access and fixed rate bonds, although some are offering higher rates than both of these alternatives. Although not fixed, the notice period for the provider to notify you of any decrease (or increase) in rate is normally the same as the notice period required for withdrawals, so you have time to move, should you so wish. This is certainly something to check beforehand.
On the basis that most banks’ funding policy aims to keep a large share of deposits rather than undergo a sudden exit from their books, it is reasonable to assume that the headline rate (or thereabouts) could continue for a reasonable period and that any decreases may be gradual – though obviously this is in no way guaranteed.
Fixed rate bonds
The traditional home for our savings is the fixed rate bond. The benefit here is that you know exactly the rate you will receive, when it will be paid and for how long. All things being equal and if the bank stays solvent, this gives you peace of mind.
One of the main problems with the fixed rate market is that the rates available are some of the lowest ever seen, and once tax and inflation are taken into account, the net returns on offer can be negative. This, combined with the fact that the Consumer Price Index has been above its 2% target for nearly 3 years, has put an even greater strain on the use of fixed rates and with the threat of rising inflation the outlook is very challenging.
The rise of the alternative
Against this backdrop and with the current market for 4 and 5 year fixed rates being very uncompetitive, it is clear to see why structured deposits have risen in appeal. Since the returns on these are not guaranteed, these are considered an alternative to fixed rates and have the potential to play an important role for medium and longer term money.
They offer the opportunity to receive higher potential returns than longer term fixed rates by sacrificing your guaranteed income with a return that is linked to the stockmarket. They still provide full capital protection and as with most fixed rate bonds, are eligible for FSCS protection (although as with any deposit, make sure to check who the deposit taker is and whether they are linked to any other banks with whom you might have accounts with).
Low, low rates
Many accounts, particularly instant access, offer a bonus, normally for the first 12 months, after which they often become highly uncompetitive. The bank is hoping that like many others, you will simply forget to revisit or simply not have the time to make changes to your accounts which is where they start to make their money and you loose out.
The combination of low rates and our failure to constantly make sure we are getting a competitive deal means that many of us suffer from low overall returns from our savings. The compound effect of leaving our hard earned savings in a low interest bearing account can be significant over time.
Spread your money
It seems that being organised will inevitably result in a higher net return on our savings pot and as such this is another aspect of cash management that should be highlighted.
In addition, not only is it important to consider the limits of the FSCS on all of the accounts we hold, but also the different types of account and how they could interact with each other. This will obviously depend on your needs, but combining a fixed rate with a deposit which offers the potential for a higher return could offer a competitive balance of guaranteed income and potential upside.
And finally, always, always make sure you review all of your options and make up your own mind as to the merits of the various accounts available. After all, our needs are our own, not those of someone else.
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No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.