With the stock market experiencing volatility due to Covid-19 earlier this year and further uncertainty about the state of the economy, you may be wondering how to make the most of your savings. Should you save in a cash account or invest?
Research from Aegon found that one in eight people have opened up a new saving account during the coronavirus pandemic. Some 70% have opted for a cash-based product, while just 30% have chosen to invest their savings through stocks and shares.
There’s no right or wrong answer when deciding between cash and stocks and shares, but you do need to consider your goals.
In the current climate, the main drawback with cash products is low-interest rates.
Interest rates have been low since the 2008 financial crisis. However, the Covid-19 pandemic led to the Bank of England slashing its base rate to a new low of 0.1% in March. It means you’re probably not getting much in return for saving your money.
On the face of it, that doesn’t seem too bad. After all, your money is ‘safe’. However, once you factor in inflation, which is likely higher than your interest rate, your savings will be losing value in real terms. That means your spending power is decreasing as time goes by. In the short term, the impact is small, but it can compound over longer periods.
When should you use a cash product? Cash savings are often most appropriate if you’re building an emergency fund and are saving with a short-term goal in mind.
Investing in stocks and shares
This year we’ve seen significant volatility within stock markets as governments grappled with how to slow the spread of Covid-19 and many businesses were forced to adapt or temporarily close.
With headlines stating markets ‘crashed’ in March, it’s not surprising that some savers are now nervous about investing in the current climate. However, when assessing markets and investment opportunities, you need to take a long-term view. Short-term volatility is normal in markets, what you should be looking at is a wider trend.
Despite numerous ‘crashes’ over the decades, markets have recovered and gone on to deliver long-term gains to investors. If it aligns with your goals, investing during a downturn can be beneficial, as you’ll be buying stocks and shares while they’re at a low point.
It’s important to recognise that all investments do come with some level of risk though. You should make sure this is tailored to your risk profile and that your portfolio is suitably diversified.
When should you use a stocks and shares product? Ideally, you should invest with a long-term time frame (more than five years) only.
Consider an ISA when saving and investing
Despite being a popular product, just a third (34%) choose a cash ISA (Individual Savings Account) to place their savings and 15% choose a stocks and shares ISA.
ISAs are a tax-efficient way to save and invest. Whether you choose cash or investment products, an ISA is worth considering. Any money earned through interest or investment returns is tax-free. Adults can place up to £20,000 into ISA products each tax year. You can deposit into a single account or spread across several.
If you’re saving for children or grandchildren, a Junior ISA (JISA) may also be a good option. Again, they are tax-efficient, and you can choose between cash and stocks and shares options. Up to £9,000 can be deposited in a JISA each tax year. However, keep in mind withdrawals cannot be made until the child is 18.
Steve Cameron, Pensions Director at Aegon, said: “Saving for the future has never been more important, and the choice between cash and stocks and shares is arguably more difficult than ever.”
He added: “For those not confident making their own financial decisions, it can often pay to seek financial advice. This can help individuals gain a better understanding of their personal attitudes to investment risk and build confidence that a chosen strategy can deliver in line with their goals.”
If you’d like to discuss saving and investing with a financial planner, please get in touch. Our goal is to understand your aspirations and help you get the most out of your money with these in mind.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.
Tax treatment varies according to individual circumstances and is subject to change.