Covid-19 has impacted all our lives in many ways and bank deposits have unfortunately not been an exception. Since the Bank of England cut its rate to an historic low in March this year, there have been brutal cuts to savings rates across all banks.
For example the best ISA instant-access rate is now only 0.90%, with a five year fixed rate ISA account now only receiving 1.21%
This means on a £20,000 investment a return of only £242 p.a. in interest. Once the impact of inflation (The latest June figures show CPI inflation at 0.8%) is considered this reduces the real rate of return on the best 5 year ISA rate down to 0.41% or only £82 p.a. on a £20,000 investment.
For an instant access rate the real return is almost wiped out, reduced to only 0.1% return (that’s only £20 on a £20,000 investment).
What lies ahead…
With the UK ceasing its transition terms with the European Union at the end of the year – should a new trade deal with the EU not be forthcoming – then it is anticipated that prices and inflation could rise further, perhaps erasing these small returns and leading to an erosion in the real capital value of bank deposits. This will be particularly noticeable for clients who have bank accounts coming out of fixed terms, who will see significant drops when they seek new rates at maturity.
What’s the alternative?
There are still good reasons to hold Cash ISA’s, in particular to hold an emergency “contingency” fund, or if you need access to the capital for a forthcoming purchase. However, if you are holding money in Cash ISA’s (or other bank savings) for other reasons and for the medium or longer term then you should be reviewing these investments and the alternatives available.
One consideration should be to transfer your Cash ISA’s into Stocks & Shares ISA’s. Here at Provisio we can take care of the paperwork to do this for you and invest the transferred capital into a portfolio to suit your needs and attitude to risk. By doing so you have the advantages of retaining the ISA tax status of any funds transferred, without using this year’s ISA allowance, and more importantly, as long as you are prepared to invest the capital for the medium term, i.e. at least five years and are happy with short term fluctuations in value, you get access to an investment portfolio with the potential for better returns.
As shown in the chart above – despite the effects of the pandemic – a £20,000 investment in our lowest risk portfolio would have returned over £3,000 more interest (after fees) than an account paying 1.25% per annum interest. Even at the height of the pandemic the value would still have been greater than the deposit account. With many stock markets still below their levels prior to Covid19, now could also be a good time to invest into the stock markets to participate in any market recovery. If you are interested in getting your bank deposits working harder then don’t hesitate to get in touch.
If you want to chat any of this through in more detail then please contact us.