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Happy anniversary: how to deal with four years of low rates

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25/02/2013
Next week marks the fourth anniversary of record low interest rates. We reveal how to make the most out of your savings in a challenging environment.

With interest rates still at record lows of 0.5%, it is a trying time to be a saver. 

People looking for shelter against the corrosive effects of high inflation and low interest rates are being urged to become pro-active to make their money work hard for them.

Read the industry experts’ top tips on how to make the most of your savings and investments.

1. Karen Barrett, Chief Executive at unbiased.co.uk, said: “With the base rate passing the four year milestone of staying at 0.5%, one thing should be clear – doing nothing and hoping for better savings rates is not an option.

“Four years is a long time and it looks like we are set to stay at this level for some time. Rates on cash savings are not what we were seeing five years ago, where instant access accounts would offer 5% and more!

“The onus is on us to ensure we are making our money work as hard as possible and in order to maximise returns we need to take an active approach to our money. A discussion with a professional financial adviser about your savings and investment strategy can be a great starting point”

2. What’s my cash option?Tony Larkins (Beacon Wealth Management Ltd)
“Interest Rates have been low for a long time and old accounts are now paying nothing or 0.1%. Make sure you look around and compare rates. Usual suspects for a better rate depend on how much risk an individual wishes to take with their money.

“For cash I would consider the various National Savings products which range from 0.75% to 2.25%. Even Premium Bonds are designed to average 1.5%. Cash ISAs can pay just over 2%.”

3. Review, review, reviewHelen Howcroft (Equanimity Independent Financial Advisers Limited)
“It is essential that investors regularly review the rates of interest earned in cash accounts and Cash ISAs. Many accounts pay a higher rate of interest during an introductory period and then the interest rate drops. By not reviewing and moving cash regularly, it is quite feasible for cash to be returning very little interest.”

4. What’s the impact of inflation? Adrian Lowcock (Hargreaves Lansdown)
“Inflation is eroding the purchasing power of cash (its value in real terms) and it is now worth 13.23% less than that it was four years ago.

“Keeping your savings in cash is not risk free as over the longer term inflation slowly erodes the value. To prevent further erosion from inflation, investors need to secure returns above the RPI (Retail Prices Index), which is currently at 3.3%.”

5. Consider investingClaire Walsh (Pavilion Financial Services)
“If you have more than six months living expenses in savings and you want to get above inflation returns then you should start to consider investments.”

6. Remember; investing is for the long termJoss Harwood (Eldon Chartered Financial Planners)
“We must educate people away from there being a ‘good’ time and a ‘bad’ time to be invested or to hold just cash and help them to understand how investment returns work with regard to the timescales of peoples’ lives.

“A properly diversified portfolio that includes shares, fixed income securities and a relatively large proportion of accessible cash that is held for the long term will see most folks through.”

7. Am I taking a risk? Anna Sofat (Addidi Wealth)
“At the end of the day it’s important you are comfortable with the risk you are taking. Wherever you go, you need to take some risk so make sure you understand and are comfortable with the risk vs. return equation.”

8. Think broadly with your investmentsScott Gallacher (Rowley Turton IFA Ltd)
“Those prepared to accept investment risk should consider investment into UK or Global equity income funds (preferably within a Stocks and Shares ISA). These invest into a range of UK and international companies, and currently yield between 3% and 5%.

This would give an initial income much better than deposit rates with the prospect of both a rising income and capital growth over the longer term.

“Whilst the value of shares may rise and fall, the dividend income from a broad spread of top quality UK and international companies tends to remain fairly stable and has trended upwards over time.

“Hence if you focus on the income statements as opposed to the valuation statements shares look a very sensible investment from an income perspective.”

9. What about funds? Mike Horseman (Cockburn Lucas Independent Financial Consulting)
“My top tip is use global equity income funds with a large cap style bias as these will already yield around 4% and will offer inflation protection in the longer term for those that can tolerate capital fluctuation and have a 5 year time horizon or more; this asset class we believe will provide a rising income and prove to be a rewarding investment in the future at current levels.”

10. Don’t panic! Jason Witcombe (Evolve Financial Planning)
“When returns from savings are low, we often see an increase in the marketing of “alternative” asset classes that try to sell the idea that high returns can be achieved with low risk.

“This simply isn’t possible. There is a tendency for even the most cautious of people to panic and throw their cash at an investment they don’t understand, simply because their cash returns are poor. This isn’t a good motivation for investing and if it sounds too good to be true, it should be avoided.”

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