30 April 2008
Contrary to popular belief, savings accounts aren’t always the ‘low risk’ option and could even be seen as a risky choice for long-term savers, says Jonquil Lowe, author of Save and Invest, a Which? essential guide, published 30 April.
In the wake of the Northern Rock crisis, falling property prices and a volatile stock market, many people are looking for ‘risk-free’ options for their savings, but the book explains that by doing so, they may lose out by thousands of pounds in the longer term.
Although there is little or no risk that people will lose their money in a savings account*, it won’t grow by much more than inflation, and may even grow by less for higher-rate taxpayers.** Moreover, returns from savings accounts are generally too low to achieve major, long-term goals, such as saving for retirement or paying off a mortgage.
People planning to save for longer than ten years should include ‘higher risk’ options, such as shares, and spread their savings across a number of assets to manage risk. Although there is no guarantee that savers will get back their initial capital, by taking a more balanced approach and doing their homework, there is potential for a higher return.
Jonquil Lowe, author of Save and Invest, a Which? essential guide, says:
“There is no such thing as risk-free saving. Even sticking cash under the mattress is a fairly risky strategy, as your capital will be seriously eroded by inflation over time.
“For short-term savers, a cash ISA or other high-interest savings account is a good option. But for those savers who are looking at a longer period of time and are willing to be a bit more adventurous, other options could give a greater return.
“The key to all successful long-term saving or investment is to make sure you’ve done your homework, understand the options and, if you’re uncertain, take sound financial advice.”
-Ends-
* Under the Financial Services Compensation Scheme (FSCS), deposits in a savings account are covered up to a limit of £35,000 should the account provider fail. Joint account holders can claim up to £35,000 each but the limit applies to all deposits with the same bank, including current accounts, and often across all brands within the same financial group. Other financial products like investment funds attract different levels of protection. To ensure that all savings are fully protected check the Financial Services Compensation Scheme website www.fscs.org.uk.
** If inflation was 4 per cent a year and you invested in an account paying gross interest at 6.4 per cent a year, higher-rate taxpayers would get a return of 3.84 per cent after tax, which means their return lags 0.15 per cent behind inflation.
Save and Invest, a Which? essential guide, is written by Jonquil Lowe and will be published on 25 April 2008. The book can be ordered on 01903 828557 (£10.99, p&p free) or at www.which.co.uk/books or bought from bookshops.
About the book
Save and Invest, written by Jonquil Lowe, is a detailed exploration of all saving and investment avenues suitable for those approaching the markets for the first time and for those seeking to improve their portfolio.
The guide introduces the basics of understanding risk and suggests popular starter investments. Many types of savings accounts are closely analysed, along with investment funds, asset allocation strategies and more complex investment options such as venture capital trusts, high -income bonds, hedge funds and spread betting.
About the author
Jonquil is the author of over twenty personal finance books, including two other Which? essential guides – Giving and Inheriting and Pensions Handbook. Jonquil is an economist by background, worked for several years in the City, and is a former Head of Money Research at Which?. She holds the Diploma in Financial Planning.