How to save in turbulent times
Whether you are a pensioner, professional investor, or someone with a bit of extra cash, recent events in the global economy are far from encouraging if you are looking for returns on your hard-earned cash. For most, savings accounts still remain the best option.
Think again if you believe you can make a killing off the stock market. Markets around the world from Tokyo and New York to London and Frankfurt have plummeted to unprecedented levels. So great was the dip in global stocks on one trading day that seasoned brokers were left clasping their mouths. With indices now showing a slowdown in the world's largest economy, austerity and political sclerosis characterising much of Europe and tightening monetary policy in emerging economies such as China and Brazil, global stock markets aren't going to be bullish anytime soon. In fact, the markets could even take a turn for the worse should these events precipitate a double-dip recession.
Perhaps you believe buying into safe havens such as triple A sovereign bonds are a risk-free, lucrative way to invest your money. This is not necessarily the case on either account. As the political stalemate and downgrade in the US has shown, even an economic giant with the world's reserve currency is not an entirely safe bet. With markets and credit agencies eyeing up France's triple A rating, it may be only a matter of time before a series of downgrades sweeps the remaining members from this exclusive club. Coupled with this is the fact that yields on sovereign bonds are at record lows as investors are prepared to accept negative returns on their investments for want of safe alternatives.
It would seem that arguably the most boring choice, the bank, may also be the best option. Sure, so you won't be joining the City high fliers on the floor of the London Stock Exchange shouting out orders, but at least you can be sure that your savings are making you sufficient returns.
High-interest savings accounts aren't going to be the most lucrative investment you will ever make, but they are one of the best truly risk-free options during such tumultuous times. ISAs, or Interest Savings Accounts, are the most popular of these precisely because up to £80,000 of your savings with banks are safeguarded in the event of the financial institution going into administration. Add to that the tax-free status of a given amount of funds placed in the account each tax year and the bog standard Individual Savings Account becomes an alluring option.
There are essentially two variants: cash and investment accounts.
A cash or fixed rate ISA is not too dissimilar to a typical current account. You can access your money from an ATM with a bank card and pay in just as easily. The one, albeit delightful, difference is that on average you are offered a substantially higher interest rate. You must be over the age of 16, and for an exemption from tax being levied on the interest accrued you must pay in no more than £5,340 each tax year. It is worth noting that you may be charged a penalty for accessing your funds if the account you have opened is for a fixed term, so only choose these accounts if you do not need to access your savings for the stipulated period in the contract. The upside, though, is higher interest rates to offset less flexibility.
The investment account, conversely, is a riskier but potentially more lucrative option. This will depend upon how you invest your savings, though. Exemption from tax on your savings is more generous - here you may place a maximum of £10,680 in your account in each tax year. But in recognition of the fact that you may also lose money on an investment account, you have to be over the age of 18 to open one. The defining feature of an investment account is flexibility; you decide on who invests your money, this can be yourself or a fund manager, and how much risk, and therefore returns, you are willing to assume.
Whichever you choose, be sure to compare both online and on the high street for the best rates; after all, base rates aren't going to creep up anytime soon.
