Stockmarket is the new savings account
The UK's 38 million savers were told they should pile into the stockmarket today as high inflation and diminished interest rates killed off returns.
Although savers have seen interest rates drop and returns blighted over the last two years, additional factors are making saving almost pointless for many looking for income and growth. A combination of yesterday's two-year high stockmarket close and the announcement that inflation had crept up to 3.3% in November provided final nails in the coffin.
With RPI at 4.7% a basic rate tax payer needs a savings account to earn 5.88% to negate the effects of inflation, while a higher-rate tax payer needs to earn 7.83%.
Data from the Moneyfacts website reveals that just three of the 2,203 savings accounts available pay a real rate of return. For higher rate taxpayers, there is just one.
"Only one ISA beating inflation at 4.7% is available to both basic and higher rate tax payers, but you have to commit funds for five years," says Moneyfacts spokeswoman Melanie Slade".
"Basic rate taxpayers can invest in the One Year Combination bonds from Yorkshire Building Society and Barnsley Building Society, but they must open another longer term investment product at the same time. Something, which will rule out most people," she adds, warning: "With inflation likely to continue to rise in the new year, the situation will get worse before it gets better."
The FTSE 100 has gained more than 10% over the year and there are plenty of blue chip shares which are currently yielding returns to beat many of the better savings accounts. But inexperienced investors need to be aware of the risks – not least to their capital.
"People should sit down and do some proper financial planning," says Justin Urquhart Stewart of Seven Investment Management. "A balanced portfolio should yield 7% per year on average and you can double your money after 10 years."
Emergency savings will always be essential but those disillusioned with accounts over the longer term may find what they are looking for in the stockmarket if they do their homework. Anyone new to investing may find that holding stocks and shares in an individual savings account is a happy medium and has the added bonus of delivering tax-free income.
Mr Urquart Stewart advises: "People should aim to make money the old fashioned way: slowly."
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Named after a high value gambling chip, the term is used for an investment seen as solid and whose share price is not volatile. Blue chip companies are normally household names and have consistent records of growth, dividend payments, stable management and substantial assets and are the bedrock of a pension fund’s portfolio.