Savers sticking with bank accounts not stocks and shares but are they right to do so?

30th November 2012


Many British savers are sticking to bank and building society accounts when it comes to their savings strategy but should they actually be in the stock market?

The results of a You Gov survey of more than 1,000 people, run to coincide with financial planning week, shows that just one in ten will consider stock market investment in the next year in the hope of achieving higher returns.

This has, unsurprisingly, worried the Institute of Financial Planning, the organisation behind financial planning week and perhaps even less surprisingly the fund manager sponsoring the week Liontrust.

Yet although they may have a vested interest, perhaps they are right to be concerned. People will obviously benefit from putting money aside but the value of that money could erode substantially when you consider the relatively high rate of inflation and the typical rates available on most bank accounts.

This situation has been aggravated by the economic context, with the Bank of England keeping base rates very low despite the inflation rate, as policymakers and politicians grapple with the consequences of the financial crisis.

The survey also shows that women savers are even more cautious – just seven per cent say they are likely to consider stock market investment.

Two thirds of those over 55 deem themselves unlikely to consider investing while the figure for 18 to 34 year olds is 71 per cent.

Here are a couple of the relevant quotes – first Nick Cann chief executive of the Institute of Financial Planning and, of course, a Mindful Money columnist.

He says: “Today’s result shows us that more than ever, the consumer needs professional help with planning their finances. Just leaving money in a bank account is going to see it erode over time with the effects of inflation and that is very dangerous. A plan of action is required to determine what short, medium and long term goals exist so that effective savings and investment strategies can be used which will be mindful of the individual’s attitude to risk and loss, and give the chance of them maintaining the value of their capital over the longer term. Understanding the options at least has to be a positive step forward.”

Rebecca Taylor, IFP President, who as managing director of Dunham Financial Services helps clients plan their money, says: “While keeping your money on deposit is fine for the short term and particularly for those funds you might need in an emergency, there are considerable risks to doing so for the longer term as inflation will erode their value. Of course, if they are investing in the stock market, people must be prepared to see the value of their capital fluctuate. However, over the long term, by investing in “real” assets like stocks and shares, people have the chance that the value of their capital will appreciate rather than depreciate.”

There is very little to disagree with about these sentiments particularly if potential investors make sure they genuinely appreciate the risks involved. It means for example not even thinking about investing money in the stock market which you think you might need to call on, and most definitely not if you need to access the full amount. Financial advisers also recommend you have ready access to cover at least three months of outgoings.

But if you are looking at a time horizon of several years or you are trying to build a retirement fund, then at very least beating inflation ought to be one of your goals. It may make sense to contact one of the IFP’s members if you really want a coherent plan.

We’ll be talking to Nick Cann to get his feedback on the week's events soon.

In the meantime, it feels like the mass of the British public have either lost faith or never had faith in investing. However, while they may not be interested in the subject, that could all be about to change anyway.  

New pension reforms being rolled out across the country with employees ‘opted in’ to a pension fund unless they specifically say they do not want to join. In most cases, these will be defined contribution pensions, i.e. there will be a direct link between returns and the pension you eventually get paid when you retire.

In the meantime, if you are one of those who are determined to stick to bank and building society accounts – this website – is one useful way you can at least monitor those accounts to see if you are getting the best rate.

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