In the post-2008, low interest rate environment that most of the developed world is experiencing, it can prove more of a challenge to maintain the value of your savings. While they are safe assets and widely used, deposit accounts or government bonds do not provide competitive returns and, in some cases, hold negative real interest rates. Yet even with high returns, fees and taxation can also be a source of leakage from savings accounts! Indeed, finding an option that offers security, real returns and protection from such leakages is a cornerstone of financial planning.
Achieving high interest rates that beat inflation is perhaps the best way to actually make money on savings, highlighting the need to shop around for assets that will provide high rates. Historically, the return on the S&P500 has averaged around 10%, meaning that investing into an index tracker fund that follows this index would offer much higher returns than something like a bank account would. Alternatively, there are a host of trusts and actively managed funds that can be tailored to individual needs based on risk appetite and flexibility. Most funds offer highly diversified portfolios to clients for fees that range from around 1 to 2%, which may utilise hedging to limit the risk exposure to your savings. As with most aspects of financial planning, consulting a specialist advisor that can provide advice on the best option for you specifically can prove financially worthwhile.
Yet savings are not just eroded by inflation. The fees present on many bank accounts can pose problems to savings and are often hidden or unnoticed by the account holder. Overdraft fees (arising when a withdrawal exceeds the available balance) amounted to around$5.1bn in the USA for the 3 largest banks in 2015, indicating the scale at which fees can eat away at some savings. Inactivity and minimum balance fees are also easily avoidable – no money need be wasted given prudent financial planning. ATM fees could also add up to 5 or 10% of the total withdrawal amount, if using a different ATM than your banks’.
Taxation is yet another issue to take into consideration – no one wants taxes eating away their retirement holdings. In the UK, up to £40,000 of private pension contributions a year are tax free, while they may also receive tax relief as a bonus. An ISA (Individual Savings Allowance) is another policy that can be used to protect savings in the UK. Tax is neither paid on interest on cash in an ISA, nor the income or capital gains from ISA investment. You can save up to $20,000 in an ISA per (tax) year, or split this amount across several forms of ISA, these including; ‘cash’; ‘stocks & shares’; ‘innovative finance’, and a ‘Lifetime ISA’. A Stocks & Shares ISA thus could provide an individual with the high returns of share/fund investments, yet without paying the transactions, income or capital gains tax that comes with buying & selling shares. Indeed, the caveat of only being able to invest up to £20,000 a year may be an issue for some, but there is no denying that ISAs provide a lucrative tax-free opportunity for savings.
As with any financial planning, speaking to a wealth management consultant would be a good course of action to ensure that your savings are not losing value, whether that comes in the form of inflation risk, fees or taxation.