A personal finance expert has warned savers with £20,000 after a major change in financial markets. Government bonds have been sold with the highest yields on record, meaning people could potentially cash in. Britain sold £4.25bn of 30-year bonds with a 5.82% yield, outstripping any sale since records began in 1998. Higher market rates mean there are opportunities to earn more on cash.
Potential earnings gap
Hargreaves Lansdown investment strategy director Anna Macdonald said £20,000 sitting in an average instant access account at a high street bank was earning around £190 when it could earn as much as £764.
She told Sky Money: “The bigger question is how long these higher yields persist. Much will depend on inflation, economic growth and the global backdrop. Those factors are difficult to predict, but for now it appears markets are expecting borrowing costs to stay higher than many people had anticipated.”
Investors should “avoid making knee-jerk decisions” in response to market moves, she said. “While rising yields can create short-term volatility, they have also improved the income available from cash, bonds and other lower-risk assets.”
Bond buying and tax benefits
“Investors who can buy gilts directly and hold to maturity can now lock into higher yields, and for UK retail investors, these gains are exempt from capital gains tax.”
Investors might also choose to buy low-coupon bonds and hold to maturity, where more of the return comes in the form of a capital gain, to make the most of the CGT exemption, she explained. But she warned these were more vulnerable to price volatility, meaning if you did need to sell before the bond matured, you would be exposed to its price moves.
“Diversification remains important, and investors should make sure their portfolio matches their long-term goals and attitude to risk,” she said.
Inflation erodes savings
As well as transferring savings to investments, savers have also been recently warned about the risks of not managing their finances properly - and leaving their money in low-interest accounts. If your savings provider is not delivering at least the current inflation figure of 2.9%, your funds are being steadily eroded, according to financial experts.
Numerous easy access accounts offer interest rates of up to 5% – yet research has revealed that millions of people have their cash sitting in accounts generating virtually no return. Savers with approximately £8,000 tucked away have been issued an urgent warning following the findings. The Office for National Statistics (ONS) confirmed that Consumer Prices Index (CPI) inflation climbed to 2.9% in July, up from a 15-month low of 2.6% in June. This follows a 13% rise in Ofgem’s energy price cap last month, which pushed the average gas and electricity bill up by £221 to £1,862 per year.
The typical account earning below 2.5% holds a balance of £8,099. In total, adult savings held in accounts earning 2.5% or under amount to £502 billion, according to fresh analysis of CACI data by savings app Spring.
The research revealed a staggering £502 billion is currently languishing in adult savings accounts earning 2.5% or less – meaning those funds are failing to keep pace with inflation, which currently stands at 2.9%.
Expert advice on savings strategy
Harriet Guevara, chief savings officer at Nottingham Building Society, said: “This is a reminder that inflation still matters. Even small increases can erode the spending power of cash over time, so it is worth checking that savings are held in an account paying a competitive rate and that the account still matches the level of access needed.”
“Splitting savings across different goals can help balance flexibility and certainty. Easy-access accounts may suit an emergency fund or short-term plans, while fixed-rate accounts can provide more reassurance for money you will not need straight away - and are particularly competitive at the moment for those able to lock money away.”
A staggering 62 million savings accounts are currently earning 2.5% or below, leaving vast numbers of people effectively watching their money lose value in real terms. Remarkably, £155.8 billion is sitting in 735,000 accounts with balances exceeding £100,000, yet earning just 2.5% or less in interest.
