Wealth Watch: Money in the bank still beats stuffing it under a mattress

Published on Saturday 21 February 2009 12:48

IS STORING cash under the mattress really the way forward? Low interest rates have taken away one of the key incentives for savers, and combined with falling share prices and government bailouts in the financial sector it is easy to see why people may choose to stay away from the financial institutions they once trusted.

Although we are living in what could be referred to as 'uncertain times', it doesn't have to be all bad. Savers can sleep easy now that sums up to 50,000 are guaranteed, and real returns are to be had, not least because of sliding inflation. In some cases they are better than ever.

There is an alternative to reverting to the old-fashioned approach of putting spare cash in a biscuit tin, and it may surprise many to find out that now is the time to take advantage of savings offers.

However, a number of factors are confusing the issue. The Building Societies Association has recorded rollercoaster savings volumes throughout 2008. Low income growth and job losses have led to some precautionary saving, the BSA says, but it is too early to say what effect the latest cuts to interest rates have had on the level of savings.

The difficulty is that interest rates alone do not present a picture allowing would-be savers to see all angles. The economy is officially in a recession and this has led to a marked fall in inflation. Inflation in the UK, as measured by the Consumer Prices Index, the Government's preferred prices yardstick, is now at 3%, down from a high of 5.2% in September 2008. Importantly, the Retail Prices Index, which is the most familiar measure of real inflation in the UK, has fallen to 0.9%, its lowest level since the 1960s.

What this means is that although the returns on savings are lower due to the interest rates currently available, that money actually goes further. In some cases the potential spending power of savers may have changed very little.

This is an important point to bear in mind as we rapidly head towards the end of the tax year and what's known in the industry as Isa season. It is possible to invest in fixed rate Isas that guarantee interest rates for the next 12 months or longer. Anything that can be added to these accounts is a good thing, especially as they are tax-free.

Isas are available for anyone aged 16 and over. Whilst they have offered a niche savings opportunity for rich people in the past, in recent years Isas have become recognised as a very accessible method of saving for a wide range of people. An investment of just 1 can kick-start an Isa account. Putting aside a little each month can also be easier than committing to a one-off lump sum.

This method of saving is also encouraged by the recent cuts in mortgage rates. People on tracker or even standard variable rate (SVR) mortgages are starting to reap the benefits. As they see the cost of their mortgages come down, homeowners are also rewarded with the extra income they receive due to the drop in rates. On a 160,000 mortgage, a customer paying interest only who was on a standard variable rate of 7.29% in October last year and is now on 5.49% is saving 240 each month in mortgage payments. This is a great incentive to begin thinking about saving for the long term.

Instead of moving, many people are now looking to improve or extend their home, and an Isa is a great way to build up the funds. A saver could even use a lump sum to pay off a portion of their mortgage, meaning they will have less to pay overall.

In conclusion, there are many upsides to finding out what is right for you and your money and it's worth doing so now. Although savings rates are not as they once were, any type of saving can help pave the way for an optimistic future.

The bottom line is that to encourage people to save, people need to be aware of the benefits of traditional savings accounts. A survey by Moneyfacts in January reported that 79% of the most consistent returns have been offered by building societies, based on the last 18 months' data. But at the end of the day it is about considering the bigger picture and choosing a savings product that is right for you.

So don't let irrational fear make you hide the cash under a mattress. Let it grow. An Isa may be the way to go.

Alastair Ward is head of product at Dunfermline Building Society