Savings accounts can damage your financial health!
Don't waste the New ISA limit
"Thank you George Osborne!" These are words I don't utter very often, but they are well deserved on this occasion. He has simplified the investment rules pertaining to Individual Savings Accounts (ISAs) and has increased the amount that can be invested. From 1st July you can invest up to £15,000 during the current tax year in a wide range of investments, ranging from savings accounts to company shares. To distinguish these accounts from their predecessors, the Chancellor has come up with the innovative, indeed revolutionary, name "New Individual Savings Accounts" (NISAs).The big attraction is most of the profits you make from your investments will be tax-free, with one exception. If you invest in shares and receive a dividend, it is assumed you have already paid 10% tax on this income. This cannot be reclaimed, so it would be untrue to claim NISAs are tax-free; a more accurate description would be "almost tax free".
So here we have the Chancellor offering all of us an opportunity to invest up to £15,000 almost tax-free. The big challenge is how to take advantage of it. For most people only two options ever tend to be considered - savings accounts and shares. If you're prepared to tie up your money for a few years, the evidence is overwhelming - invest in shares. The rates of return will consistently outstrip any returns you can achieve on savings accounts. Yet despite all the evidence, I regularly encounter people who will say, "Shares aren't for me - far too risky". So what do they do instead? They put their money in the one investment that in most cases is guaranteed to lose them money - savings accounts.
So how can you possibly lose money on savings accounts? Well even if you don't pay any tax, there is another force at work that is reducing the value of your cash - inflation. Increasing prices of goods and services are eating away at the purchasing power of your money every day. If you invest in a savings account paying an interest rate that is below the current rate of inflation, you will be able to afford less in a year's time than you can now - not a desirable situation!
Now for some facts. The current rate of inflation as measured by the RPI is 2.4%. The average rate of interest currently being paid on an instant access cash ISA is 1.3%. A quick search on the internet for best available cash ISA rates suggests you will need to be prepared to tie up your cash for at least three years if you want to even have a chance of beating inflation. If you're looking at that sort of time horizon, you really ought to start looking at investing in shares instead.
In the current low interest rate environment, savings accounts can seriously damage your financial health. If you're prepared to tie up your money for a few years, you ought to give serious consideration to the opportunities offered by the shares market.