Lock away the bulk of my savings for 5 years?

Desk

I'm in the fortunate position to have a considerable amount of savings, to the extent that if I take advantage of the current five year fixed rate savings bonds at about 5% I could effectively double my salary over the next five years.

These sums have been sitting in instant access accounts for years, generating virtually zero return, but in the context of very low inflation. Now, we have an increasing base rate, a corresponding increase in the returns some banks are offering, but double digit inflation.

I'm weighing up the best options here, and would value thoughts.

I won't have a need to access these sums over the next five years, as these are effectively my retirement savings. But while the prospect of doubling my salary is very appealing, I'm uneasy about not having access for so long, and not knowing what may change in the interim.

Inflation is still a challenge, but there  appear to be indications that interest rates may now peak below 5 per cent next year and then fall back (with inflation cooled by a likely global recession). Having 5 per cent locked for five years is then very appealing. However, what if the war in Ukraine escalates? If Russia does escalate, what does that do to the financial landscape (though that might be least of our worries at that point).

I'd rather put the money into the bank than the stock market, and bonds are a little too long-term for me. I had thought about staggering fixed rate pots over the next five years, but if rates do drop back then I'm gradually losing the benefit of that current 5% fix. I wonder if it's better to say that I'd be happy with 5%, hope inflation dies down and the world doesn't go crazy, and look forward to potentially retiring five years early.

Any views or ideas?

Audaxer

Desk said:

I won't have a need to access these sums over the next five years, as these are effectively my retirement savings. But while the prospect of doubling my salary is very appealing, I'm uneasy about not having access for so long, and not knowing what may change in the interim.

You said in the first bit in bold above that you won't need access over the next 5 years, but then say you are uneasy about not having access, implying that you might need access. I think in that case, why not keep enough in easy access savings to cover any emergencies/big spends that could crop up over the next 5 years and fix the rest for 5 years. 

If the bulk of it is for your retirement to draw a rising income from in the long term, most would advise that you would be best to have at least some of your savings invested in the global stock market, despite all the world problems. 

EssexHebridean

I'm reading that as the OP not having any planned need to access the savings, but being concerned that something unforeseen could change this. 

OP- does you having a really good robust emergency fund in accessible savings help to balance out the concern if I am reading your post correctly? 

wmb194

At the moment a directly owned conventional five year gilt yields about 4%* p.a. and - at risk of a loss, of course - you'd be able to sell them at any time the market's open. It could be a good middle ground and you could build a ladder of them i.e. various with varying durations.

https://www.bloomberg.com/markets/rates-bonds/government-bonds/uk

https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/uk-gilts

*I'm not sure what the mix of running yield and gain or loss at maturity is, you'd need to check, and there may be multiple issues maturing in five years' time with different profiles.

Desk

EssexHebridean said:

I'm reading that as the OP not having any planned need to access the savings, but being concerned that something unforeseen could change this. 

OP- does you having a really good robust emergency fund in accessible savings help to balance out the concern if I am reading your post correctly? 

Hi - yes, you’ve understood me, I’d be planning to keep over £100k available in easy access funds, in case I needed it. The rest would be locked away. 

My concern is more about unforeseen global events affecting those funds while locked away. lf inflation goes through the roof, even the 5% return may not be much compensation, and I’ll be frustrated if interest rates head back up to where they were in the 70s while I’m stuck at 5%.

That said, I’m not sure our financial systems, especially our housing markets, could take a base rate that gets anywhere near double figures within the next three to five years.

I think we’d need to acclimatise to an increased base rate for a while before we could reach those heights.

JohnWinder

Inflation is still a challenge, but there  appear to be indications that interest rates may now peak below 5 per cent next year and then fall back (with inflation cooled by a likely global recession).

Has stagflation been invented yet? Beware letting predictions determine your strategy, lest the disappointment at the consequences of them not eventuating disturb your equanimity.

kazwookie

Why not split the money for 3 year fix and a 5 year fix, or something similar to this if you are worried.

born_again

Above sounds like a plan.

Look at it like this. We will have another new PM this week (maybe) which could send markets either way. Who knows how long they will last? Within 2 years another general election, which again could throw markets either way.
Even the experts have no idea.

Malthusian

Desk said:

My concern is more about unforeseen global events affecting those funds while locked away. lf inflation goes through the roof, even the 5% return may not be much compensation, and I’ll be frustrated if interest rates head back up to where they were in the 70s while I’m stuck at 5%.

This is usually the kind of reason people invest in the stockmarket. A globally diversified investment can reasonably be expected to keep pace with inflation. Not over every time period, but the longer you invest, the better your odds get. An account that just locks away your money for five years and is otherwise minimum-risk can't. Nor can lending your money to the government at a current redemption yield of 3.8%pa.  
Inflation transfers wealth from lenders to assetholders (prices, profits and asset values go up, the real value of a fixed return goes down). Trying to find loans that will keep up with inflation risks being an exercise in futility. 

NannaH

Why not do a ladder of 1/2/3/5 year fixes instead,  that’s what I’ve just done, albeit with much smaller amounts.  

Albermarle

Using  cash savings only to fund retirement is normally not recommended. Over a 30 years period inflation can hammer the value. Whilst a portfolio of mainstream diversified investments should beat inflation (although clearly not at the moment)
On the other hand if you have separately a big pension awaiting you on retirement, then it is probably less of an issue.