Time is money and the money is yours

Saving and investment choices, where to save for the best return.

For many in the UK and other parts of the developed world, it has felt like savers are punished twice for investing money. Consumerist treats are forgone in favour of saving only to experience negative returns in real ‘after-tax’ terms. Since the 1990’s low savings interest rates coupled with lower stock market investment returns have driven this change. Low interest rates on savings and lower investment returns have also impacted company, or workplace pensions many of which are in deficit. So for both working families and developed world retirees (frequently termed rich…) the challenge of where to invest savings is ever present.

The majority of economists would argue that low interest rates are the result of too much saving. But, since the 2008 economic crisis interest rates have been kept low by the Bank of England. The hope has been to assist government budgets and austerity measures to keep inflation low, encourage trading and purchasing and to drive GDP (gross domestic product). According to the Economist ‘a “savings glut” means that the returns from investing have inevitably fallen’ – the double impact.

But has the 2008 crisis changed the way that people save?
Though Britain’s household-savings ratio (calculated as savings as a percentage of disposable income) reached a high of 12% in late 2012; in the fourth quarter of 2015 it was at 3.8%. This despite the average savings ratio being at 10% from 1963 to 2015*. Which means that this downward trend is unusual and possibly, in economic terms at any rate unhealthy. The other concern is that traditionally companies and businesses use the metric of household savings to finance expansion. But for much of this century UK corporations and companies in the developed world have been net savers. Perhaps companies like people are just being cautious about where and what they invest.

Is the choice as simple as savings accounts or stocks and shares investments?
Recently released findings from research where investment of cash in a best buy one-year deposit account was pitted against the return on investments in a stocks and shares tracker fund would suggest No – though it does depend on the length of time that the investment is made for. Paul Lewis, BBC Radio 4’s Money Box presenter found that over an 18-year period savings invested as ‘active cash’ in best buy one-year deposit accounts earned a 6% interest rate, whereas tracker funds returned a 5% interest rate on savings. However, savings invested for more than 18 years in stocks and shares tracker funds returned the highest interest rate. Critics of Lewis’s research have said that it is not feasible to move cash every year to best buy one-year deposit accounts, and that it leaves investors with little flexibility as regards accessing their savings. Their recommendation was that investors should discuss Investment Savings Account (ISA) options with an Independent Financial Advisor.

With savings and investments returning lower amounts is my money better invested in property?
Changes to stamp duties and the profitability of second homes in this tax year; mean that the answer to this question is not clean cut. However lifetime mortgages for the over 55’s are growing in popularity; and UK housing, particularly in London and the Southeast, is the most unaffordable globally, meaning that UK property can still be a good investment. We would advise you to book a consultation with your IFA and discuss the best saving and investment options that are available to you. If you are cohabiting we would advise that both of you speak to an IFA about investment options, one size, in our experience, most definitely does not fit all.

*Household Savings Rate – source the Economist based on ONS (office for national statistics) & Federal Reserve Bank of St. Louis figures.