Some savers are jeopardizing their hard-earned money by holding too much on deposit. Savers clutching onto extra cash during the coronavirus (COVID-19) pandemic need to think about their long-term investment options, as new data indicates the savings ratio for some people has increased during the pandemic.
Figures published by the ONS (Office for National Statistics) show that the savings ratio as a total, which measures the amount of extra cash UK residents have, has increased during this period. As a result, many households have been able to up their cash deposits throughout the pandemic, due to a combination of less spending during lockdown and households actively putting more into cash reserves.
Risk Of Inflation Exposure
But cash is the type of investment that is most exposed to the risk of inflation. Over the long term it tends to underperform ‘real assets’ like stocks and shares. Inflation is an extremely powerful destructive force and understanding it is an important factor when it comes to financial success. Over time, inflation can lower the value of your savings, because prices typically go up in the future.
Homes Holding Onto More Cash
The largest positive contributing factor to growth was from non-alcoholic beverages and food, which increased by positive 3.5% compared with Quarter 1. These figures mirror the Bank of England’s estimates that the deposits in UK household bank accounts grew by £17bn per month between March and June, more than 3 times the rate seen in the previous 6 months.
But as some households are able to hang onto more cash, many have received underwhelming interest rates on their cash savings. NS&I slashed their rates recently on their savings products, whilst other cash accounts offer fairly modest returns.
Emergency Cash
A cash savings buffer is crucial as it provides protection in the event of a loss of income. This means you have something to cushion your fall and avoid short-term borrowing to cover day-to-day costs. It is recommended that households have enough savings at hand to cover between 3 to 6 months of essential spending. This money should be kept in an account that is easy to access, although this typically means little or no interest.
Cash Savings
Once you have enough to protect you from a financial emergency, it is important to start to make some of that money work harder. Securing money in a deposit account can help savers achieve a modest return, although rates on cash tend to be very low.
Stocks & Shares
Over long periods of time, the stock market has performed well historically. There has been and will continue to be plenty of obstacles along the way, but the overall trend has gone upwards.
Investing can deliver greater long term returns, but remember that markets go up and down over time and past performance is not guaranteed, so it is important when investing to leave the money untouched for several years. An efficient way to invest is through a Stocks & Shares Individual Savings Account (ISA).
If you have built up a lump sum, this can be invested into an ISA account in one go; however, depending on your particular situation, it may be appropriate to gradually invest in funds or stocks over a period time. This process, known as ‘pound cost averaging’, helps to keep your investments smooth and stop you from investing all of your savings at a peak in the market.
Lifetime ISA (LISA)
Another type of ISA account, the LISA, provides a savings boost from the Government. This is only given to those who use the money to purchase their first home or don’t access it until they reach 60. So, it is mainly aimed at first-time buyers, or people who have maximized their pension contribution allowance. If you withdraw for any other reason, then a penalty will apply.
Pensions
Pension tax relief is offered when you save into your pension, rewarding savers with a 20% or 40% top-up for basic and higher-rate taxpayers respectively. Strict penalties apply to withdrawals before age 55, but for those who intend to commit money towards their future this is a very tax-efficient way to invest for the long term.
Those people in employment eligible to be auto-enrolled into a workplace pension should already have regular contributions to their retirement fund being made through their salary. If they have extra disposable income they may want to consider paying more into their pension.
Some workplace schemes may not be able to provide this, in which case a personal pension provider can receive contributions. Normally 20% tax relief will be applied and higher-rate taxpayers may need to recover any additional tax relief via their tax return. This can be quite tricky to achieve by yourself, so please get help from a specialist pension adviser.