Savings rates carnage: Six alternatives to holding cash
Figures from the Bank of England’s Money and Credit report show that £12.3bn was ploughed into cash savings accounts last month.
But savings rates are at an all-time low. According to the Bank of England, the average effective interest rate paid on individuals’ deposits last month was just 0.53%, while NS&I has cut the rates on several of its accounts to just 0.01%.
For many people it will pay to find an alternative home for their spare cash. Here are some possibilities:
Stocks and shares
Over the long-term, the stock market normally generates higher returns than cash – although it is more risky.
According to Barclays Smart Investor, someone who saved £10,000 in cash in January 2010, assuming average savings rates, would have accumulated £10,580 by December 2018. But if they’d invested the same amount in shares, they’d have a pot of £23,760.
Everyone can save up to £20,000 in ISAs each year, so an equity ISA can be a good place to begin investing.
If you’re under 40 and plan to buy a home at some point, opening a Lifetime ISA is a no-brainer.
The Lifetime ISA lets you save up to £4,000 a year towards your first home and gives you a cash bonus of up to £1,000 a year from the government on top.
The money can also be used to fund your retirement after the age of 60.
Lifetime ISAs can either be cash or stocks and shares – so as well as the government bonus you’ll earn interest on cash deposits, or hopefully see an increase in the value of your equity portfolio.
According to Moneyfacts, the top paying cash Lifetime ISA at the moment is from Moneybox and pays 1.1% AER.
According to the Association of Investment companies (AIC), if a parent had invested a one-off £1,000 in the average investment company for a child 18 years ago, it would now be worth an impressive £7,913 (a 691% return), or annualised return of 12%.
If they preferred to make monthly contributions instead, for example £50 a month, their total investment of £10,800 over 18 years would now be worth £34,348.
James de Sausmarez, director and head of investment trusts at Janus Henderson said: “Investing in the stock market does involve risk as the value of your investment and the income from it can go down as well as up but if you are investing for the medium to long term then this risk to your capital is reduced.”
Pay off credit card debt
If you have credit card debt or an overdraft, the interest rate on these debts will almost definitely be more than your cash savings are earning.
So it makes sense to use your savings to pay off your debts.
According to the latest Bank of England Money and Credit report, consumer credit was down £0.6bn in October, driven by credit card repayments. Since the beginning of March, households have repaid £15.6bn of consumer credit.
Overpay your mortgage
If your mortgage allows it, you can save a lot of money by overpaying.
Making lump sum or monthly overpayments will reduce the amount you owe more quickly and also save you hundreds, or thousands, of pounds in interest over the term of the loan.
For example, if you had a £250,000 mortgage and £50,000 in savings, ploughing this cash into your mortgage would mean you only pay interest on £200,000.
The price of gold has risen this year after the coronavirus pandemic prompted investors to turn to the safe haven to avoid volatility in the stock market and low interest rates on cash savings.
In September The Pure Gold Company reported a 683% increase in first-time investors purchasing physical gold bars and coins.
Gold is viewed as low risk in a crisis, due to its defensive qualities and lack of correlation to equities and bonds.
Perhaps one to avoid….Peer-to-peer lending
Before the pandemic, peer-to-peer lending was viewed as a viable alternative to cash savings, with higher returns on offer. Savers or investors generally lent money to vetted small businesses via a peer-to-peer platform.
But many peer-to-peer investors, particularly those with Ratesetter, have reported difficulties withdrawing their cash during the pandemic.
Money held in peer-to-peer accounts isn’t covered by the Financial Services Compensation Scheme (FSCS).