Savings are at risk of being eaten by inflation

Published on Thursday 14 July 2011 16:31

THE "Age of Austerity", a phrase we have all heard over the past few months, has seen UK households tighten their belts and it is thought we are now saving at least 5 per cent of our income to help us through these tough financial times.

In years gone by, our parents and grandparents would have spoken to their bank manager and arranged a suitable savings account. Nowadays, loyalty to our local branch has diminished and savvy savers are looking further afield and using different institutions to hold their cash.

A quick look at one of our high-street banks shows there is no interest paid on credit balances within current accounts and its instant-access saver account is offering an interest rate of 0.1 per cent gross. A general review of internet-based instant-access savings accounts shows it is possible to achieve an interest rate of around 3 per cent.

Holding your money on deposit is not a bad investment choice. However, investors must ask themselves: "What am I saving for?" If the goal is short-term then a deposit-based account could be an option, as market fluctuation will not affect the capital holding.

If, however, the savings are excess income and are not required for a specific purpose it could be prudent for the investor to consider diversifying further. Rising inflation means that holding capital on deposit for longer periods may reduce "purchasing power". This is a risk which is often overlooked by many deposit-based investors. The IMF has stated it believes that UK inflation will remain above 4 per cent for the rest of 2011.

A popular misconception is that if monies are not held in cash then the only alternative is a high-risk investment strategy. Nowadays a range of investment products allow the investor to commit lump sums or regular savings whilst adhering to their specified risk profile.

This may be the time to use products such as Isas, unit trusts or capital investment bonds to create a viable alternative to a deposit-based holding, without the need for direct equity investment.

Isas allow you to invest up to 10,680 in a tax-efficient environment. When capital is drawn from the Isa, no tax i s due. Monies can be invested in a range of suitable investments within an Isa, depending upon the investor's aims and objectives.

Unit trusts allow the investor's capital to be pooled with others' money for investment in the equity market. A range of unit trusts are on the market, suitable for different types of investors. Unit trusts can be funded by lump sum or regular savings and are taxable investments.

Capital investment bonds offer the investor the opportunity to invest their capital in a fund suited to the investor's profile. It is possible for the investor to draw a tax-deferred income, if required. On encashment of the bond, the proceeds may be taxable under income tax legislation.It is also possible to have a bespoke investment portfolio arranged for the investor, with the investment strategy being arranged so it follows the needs of the investor, whilst taking into account current market trends. A bespoke investment portfolio need not be a high-risk investment opportunity.

As for the future, the IMF has advised that the world GDP growth rate is expected to be 5.75 per cent for 2010-2015. In the UK we have seen company balance sheets improving, due to the lack of loan opportunities for these companies, which has resulted in better profitability.

The IMF has said the economy is expected to grow at a moderate pace in 2011. It also states that future recovery should be buoyed by private investment, supported by low interest rates and companies' strong cash position.

As mentioned before, investors must ask themselves exactly what they are saving for. The days of "keeping your money under the bed" may have gone.

However, individuals must make the most of the investment opportunities available to them and not merely hold their capital on deposit as it is "the only safe place to keep it". We all know this is no longer the case.

• Johnny McGlynn is a divisional director at Brewin Dolphin