The bad news for savers just gets worse, as declining interest returns cannot match the rate at which prices are set to rise. Savers face the continuing vicious circle of eating into their capital or taking a leap up the rungs of the risk ladder in search for inflation beating returns.
The only cash product guaranteed to beat the rate of rising prices are NS&I Index-linked Savings Certificates. New issues are as rare as hen’s teeth, but if you already hold them you can roll them over at maturity for another term.
Here are some other options:
1 Stick with it
You need some cash as an emergency fund and to meet short term bills. Six months’ worth of expenditure is a good starting point, hold more if you are retired. Use cash ISAs to shelter your savings from tax. The tax savings of ISAs are cumulative and rates will rise at some stage. You can shelter £15,240 in an ISA in this tax year and for most people this is very sensible, blue chip planning.
2 Review regularly
Savers should regularly check the rates of interest they receive on their savings accounts and cash ISAs – it can be easy to miss a notification of rate a cut – and transfer to a higher paying account to improve their returns.
3 Go long
Higher rates are usually available for those who are happy to lock some of their money away for a fixed term. When choosing a fixed term savers should consider the prospect of interest rate rises. A 4 or 5 year fixed rate bond may look like a better deal now, but could look poor as and when rates do rise. And if you encash you’ll pay penalties on the interest already received, so don’t lock away money you will need access to.
4 Invest in search of better returns
Investors can transfer Cash ISAs into a Stocks & Shares ISA in search of improved returns. This is a riskier option than cash but worth considering by those who are happy to accept the ups and downs of the markets for the potential of longer term gains. Equity income yields around 3.5% – 4% at the moment and over the longer term should also provide capital growth, thereby providing a rising income.
5 Lend in search of better returns
Peer to Peer (P2P) providers match lenders and borrowers to provide investors with attractive interest rate returns as an alternative to traditional gilt, corporate bond and fixed interest investments. P2P is an investment, not a cash alternative, so is only for those who are happy to accept risk to their capital and interest.
From April this year the new Innovative Finance ISA allows investors access to P2P products within a new, third way ISA. A good “rule of thumb” is to work on the basis that the higher the interest rate you are offered, the more risk you are taking on. There are many different providers so make sure you do your homework and understand what you are signing up for and the risks.