- Investment management
- 3 minute read
Long-suffering savers will welcome the Bank of England’s first interest-rate rise for a decade this month – but if you’re focused on long-term returns, the increase is not a game-changer. With inflation running at 3 per cent and all but a handful of savings accounts still paying an annual interest rate of less than 1 per cent, you’re losing money in real terms on deposits in bank and building society accounts.
“In the current environment, cash is not an appropriate investment for long-term savings,” argues Andy Cumming, Head of Advice at Close Brothers Asset Management. “Savings accounts may seem low-risk, but you’re almost guaranteed to earn negative returns after the effect of inflation and tax.” Savers with long-term objectives therefore need to do two things: find assets with the potential to deliver inflation-beating returns and ensure they’re investing tax-efficiently.
In practice, investments come with different risk and return profiles. Shares offer the potential for superior long-term performance, but tend to be more volatile. Bonds, meanwhile, tend to be less volatile but deliver lower returns over longer periods.
You might think investors with long-term goals should put all their money into assets they expect to deliver the highest returns, no matter what the short-term risk. However, Cumming recommends a spread of assets including shares, bonds and alternative investments such as property. “The right mix for you will depend on several factors, including your attitude to risk,” he says. “But there is always a place for diversification: by not holding all your eggs in one basket, you’ll reduce the overall risk of your investments.”
As for tax-efficiency, individual savings accounts (ISAs) offer savers the opportunity to shelter assets worth up to £20,000 a year from income and capital gains tax. Private pension plans, whether held individually or through an employer, offer a further tax-free savings opportunity – with most people allowed to invest up to £40,000 a year.
In this way, you can build a spread of investments that balance risk and reward, and also shelter your returns from tax. The final piece in the jigsaw is to build a cash contingency into your strategy: while you may be focused on long-term goals, it’s important to be able to respond to any short-term emergency – losing your job, for example. Keep at least part of your portfolio in assets you can access quickly and without penalty in the event of the unexpected.
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, 26 November 2017.