Everyone should keep some of their wealth in cash. After the economic turbulence of recent years, the need to hold some cash has never been clearer. But with interest rates set to remain low and below inflation, anyone who relies on bank interest for income, older savers in particular, will feel this pinch the hardest.
The problem is exacerbated by the pitifully low-interest rates offered by many savings accounts. Others offer a high bonus rate which disappears after six months or a year. The FCA has previously quoted figures showing that two in five savers are earning interest of 0.5 per cent or less, with one in five receiving just 0.1 per cent or less a year – equivalent to £1 in interest for saving £1,000.
“In the current low interest rate environment, it pays, more than ever, to consider alternative options and shop around”
So, how do you ensure that your cash savings are deposited with an institution that pays a rate of interest that remains consistently competitive in all economic conditions?
Tip 1: Don’t be loyal
It doesn’t pay to keep your savings with the same bank or building society as they won’t always pay the highest rate of interest. That’s because in tough economic conditions, financial institutions will often need to reassess their borrowing policies and seek to repair their balance sheets rather than entice new depositors with attractive interest rates of interest. When the good times do return to the economy, competition between institutions for investors deposits is fierce with new rates and special offers appearing daily.
Many people are put off switching accounts because of a perceived belief that it is not worth the hassle. But a new ‘Current Account Switch Service’ has recently been introduced to make it easier and quicker to switch your current account from one provider to another. The service is free and only takes seven working days to switch. Existing payment arrangements i.e. automated credits (e.g. salary) and debits (e.g. bill payments and direct debits) – will be transferred automatically from your old account to your new account, together with any funds that you hold in the old account.
Tip 2: Beware the threat of inflation
Cash savers also need to be aware of the steadfast presence of inflation. Only interest rates that are above the prevailing rate of inflation will provide a cash saver with a positive return.
With banks and building societies struggling to offer rates above the current rate of inflation (2.8 per cent), you may wish to consider alternatives.
A discretionary cash management service for example removes the hassle of keeping up to date with the best rates by doing the hard work for you. Such a service analyses and monitors the competitiveness, financial strength and administrative performance of almost every financial institution in the market to ensure you constantly get the best deal.
Tip 3: Consider peer-to-peer lending
Peer-to-peer lending should also generate you a higher return on cash savings than the banks can offer. The concept allows individuals to lend to each other at rates set by the lender. Beware, however, as you won’t have the backup of the Financial Services Compensation Scheme (FSCS) if things go wrong.
For risk adverse investors, cash can still be king, but in the current low interest rate environment, it pays, more than ever, to consider alternative options and shop around.
Find a financial adviser to help you maximise your savings.
About the author
Mark Brownridge heads up financial planning firm Mazars’ research and development team. His responsibilities include incorporating the research, development and implementation of systems to ensure the effective roll out of financial planning services and products.