In June we wrote an article around ‘Introduction to Investing’ following the Bank of England unveiling its second interest rate cut in under a fortnight. In this article we cover off the cliff-edge returns for cash savers after National Savings & Investments (NS&I) cut interest rates across their product range - this could increase the attraction of asset-backed investing for consumers.
Returns for those holding money in cash savings accounts took another fall a fortnight ago, when the government-backed savings provider slashed their interest rates.
National Savings & Investments cut rates on popular accounts to almost zero, including its Direct Saver account, which fell from 1.00% to 0.15%, and on its Instant Access Income Bond, which dropped from 1.15% to a measly 0.01%. The chances of winning prizes from Premium Bonds, were also reduced. Please note, the interest rates quoted are changing with effect 24 November 2020.
Of course, these cuts affect savers in these accounts, but the wider impact of this is the repricing of rates downwards across other products. This will limit the level of interest paid to consumers. Interest rates staying close to historic lows is a blow for savers who are already struggling with savings accounts paying ever-plummeting rates. Low interest rates could be around for some time, as the UK economy recovers from the aftermath of the coronavirus. The NS&I accounts were market-leading, meaning other providers no longer have to match them to attract consumer cash.
Consequently, NS&I made the changes following a rise in cash inflow, since the pandemic struck. With many households seeing a decrease in their spending, and many more now tightening up on their financial security, means savers have more cash. NS&I have a limit for the money it can accept each year – this is determined by the government and will make rates less appealing once this quota has been reached.
This only serves to reduce the appeal of cash-savings, where interest rates have been low for some time. Unlike money invested in assets, such as shares or bonds, cash returns are risk-free (excluding the risk of inflation, of course) and even those prepared to take on a level of risk by investing, are likely to also have a proportion of their overall wealth in cash.
Achieving the right balance between cash savings and investments is a key element of financial planning. If you are holding more in cash than you really need to be, then the over-arching growth potential of your savings portfolio will be lower, and you may struggle to hit your long-term financial objectives. That said, holding money in cash is central to your financial plan to ensure that you have funds available for when you need them - and cash will actually help you invest successfully, as it allows your investments to focus on their objectives, whether that is growth or income. Crucially, the investments are designed for the longer-term – typically 5 years and beyond.
By investing in the stock markets, you get access to a wide range of investment opportunities. The diversity is what gives your money the platform to generate potential returns when compared to the interest accrued from a bank/building society. Naturally, investing attracts a greater degree of risk, and this is something that has to be considered carefully before investing, whether you are a cautious, or adventurous investor – understanding the risks are a crucial element of the investment journey.