Savings represent a vital part of any Financial Planning strategy; it can represent the majority of an individual’s wealth down to a smaller emergency fund available to call on when risk assets are pre-disposed.

An article in this weekend’s Financial Times Money Section highlights research by HSBC regarding savings accounts that are about to mature leaving existing savers with a potential 50% fall in future interest compared to rates available when accounts were opened.

So what choice to do you have with your savings?

• Open another fixed term account?
• Accept a lower rate for instant access and wait for rates to improve before fixing again?
• Reduce or pay off debt?
• Take some investment risk?

The decision you decide to take will depend, largely, on your Financial Planning goals. If liquidity of capital is important fixing into a term longer than you can afford to be without capital for would be unwise. If you are looking to reduce the volatility of an invested portfolio pragmatism may be necessary; accept cash is to serve this purpose and not as a source of growth (of course more would be preferable).

If your Financial Planning strategy is to take little or no investment risk; your time frames or risk profile may not warrant any, then it is perhaps more important to seek the best return available. Caution must play a part here on three counts; firstly, not all savings accounts are the same (Remember Iceland?). Secondly,  to access the top rates advertised an equal sum of capital may need to be committed to potentially inappropriate investment products.  Third, what looks like a competitive rate for locking away your capital may soon be uncompetitive when rates increase so fixing for more than one year may not be prudent.

As mentioned in a previous blog holding too much capital in cash, particularly fixed at current rates,  does bring inflation risk which can inhibit any Financial Planning strategy. Inflation erodes the real return of cash so that, over the medium to long term, the purchasing power of your saving capital loses value. If inflation is at 3.5% pa for the next five years and you are in a five year account paying 3% the real value of your capital will be reduced by 2.5% at the end of your term. Not so ‘safe’!

It may be that you have debt outstanding. Using recently available capital to pay this off can be a sensible option to take, particularly for the more cautious investor. It may be decided that the actual rate needed on savings to provide growth above the cost of servicing current debt is not possible to achieve without accepting undue investment risk. If this is the case reducing debt would be the sensible option.

More risk tolerant individuals may decide that there is an unacceptable opportunity cost with paying off debts while interest payments are low so capital available now should be invested to seek better returns than is available on cash. This can be a perfectly acceptable strategy for many Financial Plans but the downsides should be clear; the risk of loss on capital and the potential loss of liquidity depending upon how capital is invested.

If you have savings accounts that have matured or are about to mature consider what is the most suitable course of action for you but do something; capital left in matured accounts are likely to get extremely poor rates.

Andrew Neligan is an award winning, fee charging Chartered & Certified Financial Planner at Informed Choice who specialises in providing Financial Planning services to Legal Professionals.  More information can be found at www.icl-legal.co.uk or by emailing legal@icl-ifa.co.uk.

Picture courtesey of Graur Razvan Ionut & freedigitalphotos.net