Britain's 38 million savers have been urged to invest their money in the stock market after being warned that for many of them it is now a "waste of time" putting their cash into a savings account.
By Harry Wallop, Consumer Affairs Editor, and Garry White 10:00PM GMT 14 Dec 2010
The warning came after official figures indicated that the cost of living had increased once again in November, making it nearly impossible to earn a real rate of return on any bank or building society savings product.
As the London stock market closed at a two-and-a-half-year high, experts said that for many savers taking the risk of abandoning a deposit account and placing it in a high-yielding collection of shares was a more sensible option.
The dearth of decent savings products was laid bare by figures from the personal finance website Moneyfacts which showed that there were just three accounts – out of a total of 2,203 on the market – that paid a real rate of return, and only one for higher-rate taxpayers.
Darius McDermott, the managing director of Chelsea Financial Services, an independent financial adviser, said: "The simple fact is if you have £1 and you invest in cash, you will lose out once you take into account tax and inflation. Most savings accounts are just a waste of time.
"But if you put that £1 into to a good high-yielding fund you will make a return. Of course your capital could increase or it could fall. That's the risk, but I would put my £1 into equities every single time."
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The Consumer Prices Index climbed from 3.2 per cent to 3.3 per cent, the Office for National Statistics said, while inflation, as measured by the Retail Prices Index jumped from 4.5 per cent in March to 4.7 per cent in November. The RPI is widely accepted as the truest measure of the cost of living because it includes housing costs.
A sharp jump in the price of clothing and food was blamed, taking economists by surprise, many of whom expected many retailers to cut prices in the run up to Christmas. There are fears inflation will carry on climbing next year because of the incresase in VAT from 17.5 per cent to 20 per cent and higher gas and electricity bills.
Just one account, an Independent Savings Account from Santander, can beat the RPI level of 4.7 per cent, offering a return of 5.5 per cent, but this is only for customers prepared to adhere to strict conditions.
Just two further bonds – a type of fixed-term savings product – offered by the Yorkshire Building Society and Barnsley Building Society offered a real rate of return for basic rate taxpayers, with a rate of 6 per cent.
Two months ago Which?, the consumer watchdog, calculated that the average saver in Britain is missing out on as much as £322 a year because of "pitiful interest" paid by the majority of accounts.
For any investor prepared to take a risk on their capital, the stock market looked a far better option, many experts said.
Mark Dampier, head of research at stockbroker Hargreaves Lansdowne, said: “You need to keep emergency money in the bank, but it’s self-evident that UK income funds are yielding more than bank accounts and these funds look good value at the moment. I am upbeat on prospects for the stock market.”
The yield on the FTSE 100 index of leading shares – the annual rate of return that investors can receive in the form of dividend payments – is 2.9 per cent, with many individual blue chips paying a far higher rate. For example, shares in oil giant Royal Dutch Shell are currently providing a yield of 5.1 per cent, with insurance giant Aviva yielding 6.2 per cent.
If the shares are held in an Individual Savings Account, the income is almost entirely tax-free.
Mr McDermott said: "Savers have to face the truth at the moment. If they have built up a pool of capital over their lifetime and they want to live off the income, putting it cash is the wrong decision."
Last night the FTSE 100 index closed up 30.36 at 5,891.21, the highest level for two and half years, as investors good economic data from America, raising hopes the world's largest economy might avoid a double-dip recession.
Many experts, however, warned that the rising levels of inflation would eat into consumers' disposable income making it far harder to put money aside as savings, be it a bank account or in shares.
The average family will be more than £300 worse off next year, even after receiving a pay rise, because of the impact of rising inflation, a surge in energy bills and a jump in VAT, according to the Centre for Economics and Business Research (CEBR), a think tank.
However, even allowing for a 2.4 per cent pay rise, they will have only £176 to spare each week from January 2011 due to the rising cost of living, the CEBR says, down from £182 at the start of this year. The difference equates to shortfall of £312 a year.
This means that over the course of the year families will be £312 a year worse off, even though the recession has ended and experts forecast the economy to grow steadily.
Official data from the Bank of England has already indicated that savers are putting less money aside each month. The so-called savings ratio – a measure of what proportion of a family's monthly income they save – has fallen from 7.7 per cent a year ago to just 3.2 per cent.
Victoria Mayo, spokesperson for Moneyfacts, said: "Inflation continues to antagonise prudent savers who are already struggling to achieve a competitive return on their money.
"Those who rely on their savings to supplement their income have been hardest hit, many of whom are pensioners."
http://www.telegraph.co.uk/finance/personalfinance/investing/8202251/Investors-told-forget-savings-accounts-think-of-shares.html
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