Whether you have your money in savings accounts or invested on the stock market, it has been a rough and confusing time. Traditional adages about spreading risk seem to have broken down – all the eggs in the baskets have smashed at the same time. So where should you put your money? 

Savings

The global financial crisis, through the collapse of Northern Rock and the Icelandic banks, revealed how risky bank accounts really are - and, paradoxically, through the actions of the UK government to protect savers, how safe. Provided you stick to UK banks and put no more than £50,000 with each (the limit covered by the UK compensation scheme), you should get your money back even if the provider were to collapse.

However, to trade legally in the UK, each bank and building society must be authorised by the UK regulator, the Financial Services Authority, and a single £50,000 limit applies per person to all their accounts with organisations covered by a single authorisation. This may include subsidiaries you had not realised were linked. Table 1 lists the main examples of providers that are part of a single authorization.

Which savings accounts are linked?

Name of authorised group - Subsidiaries and brands that are part of this group

* But, if you had money with this provider before it merged or transferred into the group, you are entitled to the same level of compensation coverage after the merger as before. Source: Financial Services Authority, August 2009 [online] www.moneymadeclear.org.uk

The main problem facing savers, while the Bank of England base rate remains low, is poor interest rates. To get the best return, make sure you:

• shop around (see Useful contacts) and are prepared to switch accounts for a better deal
• if you do not need ready access, consider bonds and term accounts where you agree to leave your savings for a fixed period in return for a higher fixed rate, and
• don’t pay tax unnecessarily - use your yearly cash ISA allowance, currently £3,600 but increased to £5,100 since 6 October 2009 if you are aged 50 or over and £5,100 for everyone else from 6 April 2010.

Inflation fears

In spring 2009, inflation as measured by the Retail Prices Index (RPI) turned negative – in other words prices were falling. That was good news for savers, because it meant the same fund of money should buy more than it did in the past. But many experts are predicting that prices will rise sharply in future as a reaction to government policies to beat the recession.

Inflation is bad for savers because the buying power of your money falls unless you can secure an after-tax return that is higher than the inflation rate.

One way to do this is to invest in index-linked investments, such as index-linked certificates from National Savings & Investments (NS&I), a government agency. You invest for a fixed period of either three or five years, after which you get your original capital back plus a tax-free return guaranteed to be 1 per cent a year plus the change in the RPI. The value of your investment does not go down if the RPI falls.

So, if inflation fell or was zero, your return would be 1 per cent (equivalent to 1.25 per cent for a basic-rate taxpayer and 1.67 per cent for a higher-rate taxpayer). If inflation jumped to 5 per cent a year, your return would be 6 per cent (equivalent to 7.5 per cent for a basic-rate taxpayer and 8.3 per cent for a higher-rate taxpayer).

Back to the market

The other traditional way to protect your money from inflation – and beat the return on savings accounts – is to invest in the stock market. The idea here is that you share in companies’ profits which over the long-term (say, five to ten years or more) will tend to increase with inflation and also benefit from economic growth. The drawback is that, while the long-term trend may be upwards, share prices can fluctuate wildly in the short-term.

The recent financial crisis saw the FTSE100 Index (a popular indicator of UK share prices) tumble from a peak of over 6,700 in October 2007 to a low of just above 3,500 in March 2009, nearly halving the stock-market value of the UK’s largest companies.

Conventional wisdom is that falls are not a problem if you are a long-term investor who can ride out the downturns. But the scale of the most recent fall made equities look a dismal investment even over a ten-year horizon. 

The worst action a long-term investor can take is to sell when the stock market is low, since this turns mere paper losses into real ones. If you already hold shares, if possible stay invested and wait for the recovery. If you have new money to invest, now might be a good time to buy.

Halfway house

If you feel the stock market is too risky but you want a better return than from savings accounts, you might be drawn to ‘structured products’ that often have names like ‘guaranteed equity bond’.

These work in a variety of ways but typically offer a return linked to changes in a stock-market index with an assurance that your capital will be returned in full even if the stock-market falls. Although the offer sounds simple, the underlying product is often very complex. Points to bear in mind are:

• with a long-term investment in shares, the return from reinvesting income is as important as any gain from rising share prices. Typically, with a structured product you do not benefit from that income
• the repayment of your capital in full is seldom completely risk-free. It will depend on guarantees offered by some underlying firm (called the counterparty). You need to check what risk this involves. The safest structured products, in this respect, are NS&I guaranteed equity bonds since ultimately the UK government is providing the guarantee.

Useful contacts

Compensation

• To check which accounts are linked: Financial Services Authority www.moneymadeclear.org.uk
• Details of the compensation scheme: Financial Services Compensation Scheme Tel: 020 7892 7300 www.fscs.org.uk
• Financial adviser - to find one go to www.unbiased.co.uk
• National Savings & Investments Tel: 0845 964 5000 www.nsandi.com
• Savings accounts - to shop around visit Financial Services Authority, Compare Products. Helpline 0300 500 5000 www.moneymadeclear.org.uk Web comparison sites such as www.moneyfacts.co.uk , www.moneysupermarket.com

Jonquil Lowe is a freelance financial writer and Lecturer in Personal Finance at The Open University. She is author of The Which? Essential Guide: Save and Invest.