Thursday, 28 November 2013

Cash is not the right savings vehicle for everyone…..

I have read some tweets and articles saying the end of Funding for Lending a year early could be good news for savers and this made me think…….why do we assume that cash is the only savings vehicle?

With cash we seem stuck in the past:

  • The FCA and savers seem to think that cash is the safest means of investing
  • We continue to think that when we retire cash is where we should hold our money
  • For something a little more risky we might look at bonds

Cash can work for short term investments; so for example where cash only needs to be held for 12 months then it makes sense, maybe for a deposit on a house. Also if people have only a small amount of savings then perhaps cash is the only option.

But other than this, personally I think cash is not the right savings for most people who use it.

  • Cash used to be a good place to invest. In 1999 the average ISA was paying 6% p.a. tax free. Taking an income of 5% would still deliver growth of 1% a year (below inflation but still comfortable). Now the average ISA return is below 1%..... this means it can no longer deliver income and growth. I recently saw a 10 year fixed rate at 4% p.a. – if you are holding for ten years then surely equities are also worthy of consideration?
  • Life expectancy has changed and so have our retirement patterns. 65 was set as a retirement age where we were expected to live less than five years in retirement. It made sense to move all money into cash because the period you need it for was so short. Now life expectancy is nearing 20 years in retirement, would you really hold money in cash for 20 years? Consider at 45 investing in cash to 65, just considering this would be crazy
  • Past performance - bonds have enjoyed a 30 year bull run; we look at cash and we think bonds have to be the place to be. No! The bull run is coming to an end, we don’t know when but many people accept that over the next five years bonds are likely to return flat or negative returns

So back to my point; perhaps savers need a lift but it won’t happen until interest rates rise, and when they do savers will be the last to benefit. In reality, rates might not start going up for at least 2 years possibly three which means savers in cash could see another decade of below inflation returns which means no real income and no returns.

We need to educate people that cash is not the only savings vehicle. In a changing environment we need to change our thinking…….

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