Where is a Good Place for Savings? With Interest Rates Declining, Where Should You Save Money?

The average interest on savings accounts in the UK has now gone below 1%, with some giving savers far less than that. When one considers inflation, this means that any cash in ordinary savings accounts is now decreasing in the real sense! So where should savers keep money in the current economic climate? Here is the advice of some experts.

Pay off as Much Debt as Possible

No matter how low the interest rate on any current debts people may have, it is better to pay it off and reduce the money in savings accounts. This is particularly true for those who have credit card and similar debts at a high rate of interest, but applies equally in the present climate to things such as mortgage debts. Experts advise keeping a small emergency savings fund, but suggest that this should not be more than three months salary; any more should be used to pay off any type of debt.

Put Extra Savings into a Cash ISA

Everyone is allowed to put £3600 per year into a cash ISA (Individual Savings Account). The interest on these is tax-free, and some are still offering a reasonable rate of interest. This should be the first place for any spare money. Many people only put money into cash ISAs at the end of the tax year, but one can do it at any time. It would be sensible to do this now, and if possible find one where the rate is fixed, before interest rates drop any lower.

Regular Savings Accounts

Some banks and buildings societies still have good rates for Regular Savings Accounts, where the saver puts in a set sum each month. The maximum is usually relatively small, around £500 at most. However the rates are usually fixed for the year, so this is worth doing now for those who have any spare cash. At the present time Barclays Monthly Saver, Close Brothers Premium gold Account, and Abbey Monthly Saver, were all offering rates over 5%.

Premium Bonds

Those with a significant amount of money in Premium Bonds usually have small wins at regular intervals, and of course there is always the possibility of winning a large amount. So this could be a sensible place to save at present, even for those who do not usually do anything approaching gambling. And since Premium Bonds are government owned, the original amount of money is always safe.

Perhaps the most important thing to do is keep an eye on savings rates and be prepared to move accounts if a better deal comes along. In the present economic situation this could make the difference between making a small gain at the end of the year, and losing money in real terms.

Higher Returns from a Stocks and Shares ISA: Investing in an Emerging Markets Fund or FTSE Tracker

The Inland Revenue has given investors the chance to benefit from tax-free savings by investing in an Individual Savings Account or ISA. It is possible to invest up to £7,200 in a stocks and shares ISA each tax year. The risk averse may wish to consider a cash ISA.

Risk Vs Reward – Higher Returns In a Stocks and Shares ISA

It is possible to keep capital safe and benefit from a steady capital growth in a cash ISA. A cash ISA won’t make anyone rich, but it is a great savings account for the risk averse. Other cautious investors wishing to take advantage of a stocks and shares ISA may wish to consider a protected capital FTSE tracker.

Just as risk is abhorrent to certain people, conservative investments are extremely unappealing to those wishing to take a chance to secure higher investment returns. Higher returns of 40-50% aren’t uncommon for those investing in an emerging markets fund.

Whilst everyone would like to enjoy tax-free savings and substantial gains in an emerging markets fund, it is important to accept that the investment capital is at risk. This means that it is vastly more sensible to invest in a variety of equity-based funds in order to spread this risk.

Different Types of Higher Risk Stocks and Shares ISA

  • Emerging markets fund. These funds seek to identify investment opportunities in fast-growing, emerging economies. These tend to concentrate on Asia and Eastern Europe;
  • Self-select ISA. It is possible for an investor to open a stocks and shares ISA with a non-advisory broker and select their own share portfolio. Some investors have created substantial tax-free savings by investing in technology shares before the boom. Others may wish to take advantage of falling banking shares;
  • Index trackers. Low management charges make a FTSE tracker a popular investment, particularly when market levels are low. Buying into a FTSE tracker can prove to be a very smart move after substantial falls for those prepared to take a longer term investment perspective;
  • Green funds. Those that don’t wish to compromise their ethics may wish to invest in green funds. Most funds marginally under-perform because of the higher ethical stance, but many still make holders of a stocks and shares ISA decent returns.

All investors have a different attitude towards risk so it is important to consider all options carefully before opting for a stocks and shares ISA. Those with a lower risk profile should normally opt for a cash ISA or capital-protected FTSE tracker ISA.

Investment Management and Investment Advice for Investors

There are various ways of reducing the risk of investing in equities. The most important is to invest in a portfolio of securities. The value of having a wide portfolio of different securities, instead of concentrating investment on a small number of individual stock or share items, is the reduction in the risk of a poor return. The investor in a portfolio is not putting all his eggs in one basket so that if one share performs badly, it is likely to matter very much because the other stocks and shares in the portfolio might perform well.

Investment management is the total administration of a customer’s portfolio of stocks and shares and unit trust holdings etc. if a bank provides an investment management services, it does so through a separate department or subsidiary company. The service will be provided within the framework of a formal customer agreement. To the banks which offer the service, investment portfolio management is really only profitable for large sums of money invested (perhaps $10,000-$50,000 or more). With smaller sums, the bank might try to persuade the customer to opt for unit trusts, instead of a personal portfolio of investments.

Risk can also be reduced by taking time and trouble to study the Stock Market in depth, and to make well informed investment decisions. An investor who knows more about financial matters and the Stock Market is likely to make better investments that produce a higher return. Not all investors have the time to study the Stock Market. They can improve their chances of doing well by obtaining expert advice, or asking an investment manager to make the investments on their behalf.

When a customer asks a bank to act as investment manager on his/her behalf, there are two different arrangements which might be made.

  1. The customer can give the bank a free hand to change the investments in the customer’s portfolio (to sell off some items and purchase new one) at the discretion of the banks investment managers. The customer will be told about the changes some time later. When the bank is given a free hand with investment decisions, the customer has a discretionary account.
  2. With a non-discretionary account, the bank must refer all proposed changes in the portfolio to the customer for approval.

The bank will prefer discretionary accounts to non-discretionary accounts in the case of small investors. With both discretionary and non-discretionary accounts, the bank will do all the routine paperwork, including dealing with rights issues and bonus issues of shares, redemptions of loans, and preparing a schedule of transactions for capital gains tax purposes. The bank will also hold the investors share certificates for safekeeping, and will handle the receipts of dividends and interest.

A banks fee for acting as investment manager is related to the value of the portfolio. This tends to mean that larger portfolios are much more profitable to manage, because fees are much higher, and are more able to cover direct cost and overheads and so make a profit. For the banks which offer an investment management service.

When a personal customer visits his bank to ask for investment advice, he does not expect just to be told that the bank has some experts that he can talk to. It is the job of the bank staff to be able to discuss investment matters in general terms and also to consider the customers financial position as a whole.