Approach to Savings as Market Changes

jaypers

I was thinking this morning how my approach to savings has altered in what is an environment where interest rates are now aimed on a downwards trend, compared to my approach when the opposite was the case.

Up to about 12 months ago, I was very keen to lock in to fixed rate deals, keeping about 70% of my non-ISA savings cash Fixed accounts (12 to 24 months), the rest in Easy Access (I do have investments too). Have reached a stage now where the last of my fixed deals are maturing, the last one due towards the end of this year. 

With interest rates on a downwards trend, and rates on offer below 5%, I’ve kind of gone off this idea a bit, and also decided I don’t want so much cash locked away either. It’s strange, but wasn’t a huge fan of Regular Saver accounts, although I did have the obvious good ones (First Direct, Virgin etc). I’ve kind of gone a bit wild on them now (up to 16, with about £4k pcm being recycled into them). Feeling it’s the best compromise of getting slightly better rates, some of those fixed rates, and in a majority of cases not locking the money away.

Guess it’s a bit of a game for many of us, and was interested what others were doing with the inevitable days of 5 to 6 percent saving accounts no longer being available. Thinking 3 to 4% will soon be the new norm. 

masonic

Yes, likewise. I loaded up on fixed terms when rates were 5-6% (and the last of mine won't mature until Jan 2027). Then started running these down into a mix of easy access and regular savers. Recently I've been loading up on more RS, picking up anything I can north of 6%. I've also been keeping an eye on gilts and snapping up bargains where I can. I may for the first time in over 10 years take out a cash ISA in April if the rate war between T212, Moneybox, Chip and others continues, as I can always transfer into my S&S ISA as and when that situation changes and I feel I have enough risk assets for the time being.

Bobblehat

With rates predicted, by some, to continue to fall this year, why are fixes (if taken out soon) not still attractive? What have I missed? Is it that the predictions are a bit too gloomy?

masonic

Bobblehat said:

With rates predicted, by some, to continue to fall this year, why are fixes (if taken out soon) not still attractive? What have I missed? Is it that the predictions are a bit too gloomy?

Issue is that on one hand you have the economy sputtering and needing cuts, and on the other hand you have protectionism and "transitory" inflation that could require increases.

A number of the regular savers paying 6%+ are fixed, so having these gives you some protection against rate cuts. You then have a price war in the ISA market, propping up easy access at a substantial premium to fixed. Even going 5.5%+ or lower could make sense now that the MPC have shown their hand.

If you would pay tax on the interest, then the 4.6-4.7% you are offered to lock your money away is only worth about 3.7% net, whereas a low coupon gilt would achieve an almost tax free return of about 4% with no lock-in (if you go 3-5 years out). Or you could lock into RPI+0.25% over 3 years, again almost tax free.

Beyond the loss leading RS, homesaver and packaged current/savings offers, the UK savings market in general is looking a bit lacklustre at the moment. I'm fortunate to be hanging on to a couple of closed issue products that haven't been cut (yet).

VNX

I loaded up on 5/5.5/6% fixes as these start to mature I’m locking away some two and three years at 4.4% ish in ISAs not too unhappy with that, easy access rates are comparably good but of course they can fall at any time and if/when they do at that point fixes will also be lower than now. 

Regular savers offer good rates but often you can’t save large sums and interest is potentially taxable. 

SVaz

You could buy gilts in a Stocks ISA, I’m buying TG33,  which gives a yield of 4.24% when held to maturity.  

4% when the platform fee is included. 

InvesterJones

SVaz said:

You could buy gilts in a Stocks ISA, I’m buying TG33,  which gives a yield of 4.24% when held to maturity.  

4% when the platform fee is included. 

That's a lot of opportunity risk for an 8 year investment inside a tax wrapper. A mixed asset fund might be more suitable.

masonic

InvesterJones said:

SVaz said:

You could buy gilts in a Stocks ISA, I’m buying TG33,  which gives a yield of 4.24% when held to maturity.  

4% when the platform fee is included. 

That's a lot of opportunity risk for an 8 year investment inside a tax wrapper. A mixed asset fund might be more suitable.

I'm with @SVaz on this one. Having bought a few even longer duration gilts in my ISA when yields were very tempting back in mid-January. I prefer to keep my defensive assets separate and bonds only make up 20% of my assets overall (up from zero last year). The individual gilts have been my best performing asset YTD

SVaz

The money I’m putting in TG33 will be spent in 2033, so a mixed asset fund definitely wouldn’t do,  what if it drops 20/30% the year before ?

I’m sticking with a Short term money market fund for cash in my sipp to be used in 2028 - 2032.   I’ve looked at Gilts but interest rates would have to drop under 3% to make Gilts a worthwhile buy.  

DRS1

OK TG33 isn't as low coupon as TN28 but why are you buying that in an ISA?  I thought most of the value for those low coupon gilts was the CGT free capital gain on maturity

masonic

DRS1 said:

OK TG33 isn't as low coupon as TN28 but why are you buying that in an ISA?  I thought most of the value for those low coupon gilts was the CGT free capital gain on maturity

Normally, if the cash is within an ISA or SIPP, you'd prefer higher coupon gilts as they tend to have a slightly higher yield owing to them being less attractive for institutional holders. However, in that part of the yield curve there isn't any premium to be had in purchasing a slightly shorter duration, high coupon variant and presumably the money is needed before Jan 2034.