By Ahmed Bawa, CEO of Rosemount Financial Solutions (IFA)
It’s been an active time for the nation’s savers.
Data from the Bank of England last month revealed that record amounts were saved in Cash ISA accounts in April. It’s always a popular period for ISAs, given the end of one tax year and the start of another, but the sums here are staggering – £11.7 billion was stashed away by savers keen to take advantage of the interest rates on offer ahead of expected falls later this year as and when base rate starts to be reduced.
However, while rates on Cash ISAs were better than has been the norm in recent years, the truth is that they may fail to deliver for savers if they are the only route being pursued.
The rate of return
Analysis from AJ Bell found that the typical instant access account pays a rate of a paltry 2.1%. That’s only just keeping up with inflation, meaning the client’s cash is barely holding its value – there’s no growth in real terms.
Yet it could be far worse. As much as £251 billion is being held in accounts that don’t pay any interest at all, meaning those balances are actively falling in value with every day that passes.
This is a disaster for those hoping to build true long-term wealth.
Looking to investments
A better option is to combine cash savings with investments. Putting money into stocks, shares or any other form of asset has the potential to deliver much more substantial returns over the long term. That means the client’s money will not only keep up with inflation, but hopefully exceed it, leaving them better off not just in cash terms but real terms.
Previous research by Schroders highlights this well, comparing the performance of cash and large cap stocks against inflation between 1926 and 2022. The study looked at how the different assets had performed compared with inflation over different time periods within that timescale, ranging from one month to 20 years, and it really emphasises how well stocks do over longer periods of time.
For example, in 100% of 20-year time periods between those two dates stock investments outperformed inflation, compared with just 66% of the time for cash savings. Even over 10-year periods stocks beat inflation 87% of the time compared with 55% of the time for cash.
That’s a fantastic message for advisers to bring to their clients, a counter to the reticence some will have about the risks involved with investment. Analysis earlier this year by LV= found that more than half of UK adults are uncomfortable about investing because of the potential to lose money.
Advisers are central to overcoming those worries, and being able to point to how investments have beaten cash – even though past performance is no guarantee of what will happen in the future – is a powerful tool.
Where should I put my money?
The record amounts being saved into ISAs is a positive indication for the economy. It shows that there are plenty of people who are able to put money aside, despite the various challenges placed on our budgets over recent years such as the persistently high rate of inflation.
Not only are they in a position to save, but they are actively choosing to do so. That represents a terrific opportunity for advisers, to help guide them in making the right long-term decisions for their financial health.
Building wealth for the long term
Having some money available in cash will be important for most clients; life will inevitably throw challenges our way, meaning we need access to our savings quickly, and cash savings accounts are the logical answer here.
But the reality is that if people want to build long-term wealth, and set themselves – and by extension their families – up for comfort in their later years, then overcommitting to cash could prove a costly mistake. The interest rates on offer simply cannot compare to the returns from properly managed investments.
Advisers have an important educational role to play, tackling the concerns around investment which can hamper a client’s willingness to consider looking beyond cash, as well as pinpointing the asset classes which may be most appropriate for them.
Getting the balance between cash and equities right will be crucial for the financial health of the client.
