How to get a return on your savings in a low interest world

Sir Mervyn King chose the theme to Channel 4’s cricket coverage, Mambo No 5 by Lou Bega, as one of his ‘desert island discs’ when featured as a castaway on BBC Radio 4 recently. He has also delivered his final inflation report at his last public appearance as the Governor of the Bank of England, a position he has held since 2003 and which he will hand over to Mark Carney, current Governor of the Bank of Canada on 30th June 2013.

Sir Mervyn believes that ‘Britain’s recovery from its greatest slump is now in sight’, but predicts that the Bank of England Bank Rate – also known as the ‘Base Rate’ – will stay below 1 per cent for the next 4 years. This is obviously bad news for savers who have suffered from years of record-low interest rates and now have to cope with the effects of the Government’s Funding for Lending Scheme, which, by giving banks and building societies access to cheap funding, has reduced the need to attract funding from retail savers by offering attractive interest rates on deposit accounts.

The only bright spot on the horizon is that Sir Mervyn doesn’t think that inflation will increase as much as he had thought it would, so although the return on your cash will remain low, it might not result in a negative ‘real rate’ of interest after inflation is taken into account. It is this negative real rate that actually erodes your capital even if you keep your savings as cash. (See our blog ‘What is inflation doing to your savings?’)

The fact remains that with official interest rates the lowest they’ve ever been and looking like they will stay that way, keeping money as ‘cash’ is proving to be an unrewarding strategy for most savers.

Here at Marchwod IFA we appreciate that cash will always play an important role in managing your finances because it does not risk loss of capital and that suits a ‘risk averse’ saver. But perhaps investors now need to start looking at diversifying their portfolio of savings by considering other types of asset such as equities or bonds. For encouragement, you need only look at the recent growth in the FTSE 100 Index, which, despite falling slightly in recent days, has risen from 5,260 on 5th June 2012 to 6,558 on 4th June 2013, an increase of 24.7% in just 1 year.

Perhaps now is the time for the more cautious investor to ‘turn risk on its head’ by which we mean that by investing in more adventurous assets you are aiming to keep your return on investment above the inflation rate (which was 2.4% in April 2013) thus receiving a positive rate of interest which does not erode your capital.

Cash should always be part of your investment portfolio, but is it time to look at other ways of getting a return on your savings? There are products available where you can benefit from rises in the stock market without risking the loss of any of your capital invested. Such accounts are known as ‘Structured Products’ and they combine capital protection with the opportunity to receive returns which are linked to the performance of the stock market, usually the FTSE 100 Index. If you would like to know more about Structured Products or any other savings product that can beat the lowly returns currently being earned by cash, please contact us now by telephone or email.