Got a question about your savings? Email in and we’ll get one of our experts to reply.April Leeson is a financial adviser at The Private Office, a chartered financial planning firm. If you have a question for one of our experts, email us at money@inews.co.uk
Question: I have £20,000 in cash savings – I’ve been considering moving this to investments, but given savings rates are so good at the moment, is it worth it?
Answer: Savings rates are nearing their peak, according to the experts, so now is a great time to consider cash savings for short-term funds.
Short-term can be anything up to five years, so if you are planning on spending this £20,000 before we reach 2029 and you don’t want to take too much risk with it, you could deposit your savings into a competitive fixed-term account. National Savings and Investments (NS&I) now have a one-year guaranteed growth bond paying 6.20 per cent. You can tie up funds in cash for varying time periods or have the cash on easy access for a lower interest rate.
The flipside of higher interest rates is that you may end up paying tax on the interest earned if you just stick it into a savings account. Using your £20,000 Isa allowance for 2023-24 and investing your cash into a fixed-rate cash Isa would be a savvy way to receive a higher interest rate and tax-free interest. The interest rate might be a little less than the equivalent taxable savings account (5.78 per cent for a one-year fixed term cash Isa), but with no tax to pay on interest it may mean a big saving for you over those few years – particularly if you are a higher rate or additional rate taxpayer.
If you want to save this money to spend further in the future, let’s say beyond five years, then this is when you could consider investing your £20,000 into stocks and shares. Why? Because in the long-term, cash is likely to lose your money in real terms vs inflation, whereas investments have a chance to keep pace with inflation and potentially grow in value.
History tells us this, by showing that cash is the worst performing asset class against inflation in the long run.
The types of investments you choose will depend on your specific risk profile. I would suggest investing into a stocks and shares through an Isa to benefit from the tax-free nature and your savings pot is within the maximum Isa allowance for the tax year, £20,000.
Depending on your UK earnings and other factors like your age, another option is to put your £20,000 into a pension. If you are a basic rate taxpayer, a contribution of £20,000 into your pension would mean a 20 per cent uplift from the government in tax relief and therefore you would get £5,000 added to your pension pot, meaning for your £20,000 contribution you would receive £25,000 paid into your pension! If you are a higher or additional rate taxpayer, an additional 20-25 per cent tax relief will be available to you on pension contributions.
Money within a pension can be held in cash or in stocks and shares, so your timeline and risk appetite still apply here.
Investment returns are not smooth like the regular interest from cash, so you have to be comfortable knowing investments may go down as well as up. The longer you can leave your savings invested for, the more likely they are to show positive returns over the years. No investment return is guaranteed though, so it’s important you understand the level of risk you will be taking and that it fits with your specific goals.
A mix of both cash savings and investments could be the answer, as long as you keep a realistic target in mind and your savings are working hard for you! By holding cash too, if you need access to your some of your money at a point when the stock markets have fallen, you can draw on the cash instead.
