Stockmarket is the new savings account

15 December 2010

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."

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