- Investment management
- 2 minute read
The Bank of England’s decision this month to raise interest rates for the first time in more than a decade offers savers some valuable respite. But if you’re planning for the long-term – to build up a pot of savings for retirement, say – the increase doesn’t really add much to the attractiveness of cash held in the bank or building society.
With the Bank having raised the base rate from an all-time low of 0.25 per cent to a still remarkably low rate of 0.5 per cent, even the most generous savings accounts pay barely more than 1 per cent a year. That’s not even close to matching inflation, which is currently 3 per cent – so cash savings are falling in value in real terms.
Additionally, many savers pay income tax on some or all of the interest they earn on cash accounts, at a rate of 20, 40 or 45 per cent. That makes it even harder to earn a positive real return.
For these reasons, Andy Cumming, Head of Advice at Close Brothers Asset Management, argues: “Cash isn’t the right asset for savers with long-term goals and objectives; instead, they need a diversified portfolio of assets that still balance risk and reward but also offers the prospect of much stronger performance over time.”
In practice, this means a spread of investments, including shares, bonds and alternative assets such as property. These are investments with different characteristics – more or less potential to grow strongly over time, but also more or less prospect of short-term ups and downs. By holding a mix, you can smooth out volatility – when one asset falls in value, another one should compensate.
While focusing on increasing the potential for your savings to deliver better long-term returns, you can also reduce the drag on performance that tax represents. Investments held in an individual savings account (ISA) – you can invest up to £20,000 in an ISA this year – grow free from tax on both income and profits. So do investments in a private pension plan; here the annual allowance is £40,000 for most savers with earnings of at least this value.
It makes sense to mix up ISAs and pensions, since investments held in the latter can’t be accessed until you reach 55. That may not be flexible enough for many savers. Indeed, everyone should have at least some savings held in assets that are easy to access, in case a short-term emergency – losing your job, say – blows your long-term planning off course for a while.
The value of investments can fall as well as rise and you may get back less than you invested.
Get in touch today to start planning your future or to discuss your long-term financial priorities.
*First seen in The Times, 25 November 2017