Cautious savers losing out on best returns

Figures released by the Bank of England this week show consumers deposited almost double the amount in savings accounts during August compared to before the pandemic, but many savers may be missing out on the best returns by being too cautious with their savings.

During August consumers deposited £9.1 billion into savings accounts, whereas in the year to February 2020, the average amount of deposits was £4.7 billion. Meanwhile, this week Investec Bank plc released research showing 35% of consumers with cash savings now have more than they did before the pandemic, with 20% claiming that the value of their cash savings is at least 10% higher than before the crisis, and 2.5% saying it had increased by 50% or more.

With the pandemic allowing some consumers to save more than they would normally, a growing number of savers have an excessive amount of money held in cash savings accounts such as easy access accounts or fixed rate bonds.

Finance experts are now warning that with some savers holding an excess amount of funds in cash savings accounts, the combination of rising inflation and low saving rates could result in savers risking the value of their savings being eroded in real terms. As a result, the Financial Conduct Authority (FCA), an organisation that regulates the finance industry, has launched a three-year strategy to highlight the risks in holding excessive amounts of money in cash savings accounts and enabling consumers to invest with confidence.

Although the amount held in savings accounts that allow quick access will depend on individual needs, the standard recommendation is that savers hold three to six months’ income in case of emergencies in an account that enables easy access. With average rates on easy access savings accounts standing at just 0.18% at the moment, those with savings that exceed this amount may want to consider investing.

Prior to investing, consumers should be aware that investments usually carry the risk of investors not making any returns on their investments and, in some cases, can result in them losing all their money including their initial deposit. However, as already highlighted, low rates on cash saving accounts combined with rising inflation means that holding money in savings accounts can also result in savers losing the value of their savings in real terms.

When looking at investments there are many different opportunities available to investors, some of which are highlighted on our how to invest page. For many taking their first step into investments, however, a stocks and shares ISA may be a good option as it has the benefit of tax-free returns on deposits of up to £20,000 for the 2021/22 tax year. There are a number of ways to invest in stocks and shares ISAs and those considering this option should research all their options thoroughly before investing or consider speaking to an independent financial adviser for guidance. One popular method for those new to investing is to do so via an investment platform which offers a single place to search and invest in shares and investment funds. For more information read our guide on investment platforms.

Although the FCA is promoting investment as an option for savers with an excessive amount of money held in cash savings accounts, consumers are being urged to be wary of high risk investments, such as cryptocurrencies. Some high risk investments have become popular due to being heavily promoted on social media and other promotional platforms. However, investors should keep in mind that these types of investments are not regulated by the FCA Although they can make high returns in short-periods of time, they can also see significant losses just as quickly. In addition to this, potential investors are being urged to be aware of the potential of being scammed.