The Bower & Collier Family History

Research by Colin Bower

Discussion Group

Online Discussion 16 November 2020

Question 3 With such low interest rates where is the best place to keep your money?

Answers

Variety of answers! Lucky to have replies from 3 people who have been involved in finance in differenet ways.

1. Under the mattress.

2. Just because interest rates are low, I would want to keep my money safe.

I appreciate that some people invest a % of their money in property or the stock market which can fluctuate. Certainly rental income is attractive.

There are some smaller savings schemes with regular savings which pay a reasonable rate.

Other than that all you can do is to spread the risk, shop around and perhaps take out short-term deposits until there are better days.

At least we don't pay so much tax (at the moment!)

3. Under the bed. Don't give it to HMRC.

4. Peer to peer lending - This is where people  entrust their money to investment managers who lend it to either other members of the public or to companies.

The risk is diminished by lending one's money to lots of borrowers to minimise the risk of default. Borrowers are credit checked by the investment company and clients can choose very high credit worthy borrowers or indeed anyone anywhere on the risk scale. The former means lower returns. As you descend the ladder of credit worthiness the rate of return increases to compensate for hgher risk. A charge is usually applied to company assets if you opt for that route.

The last time I checked one company guaranteed to absorb the first 5% of any default so it was also in their interest to conduct a meticulous check and due diligence.

5. It depends on how much money you are talking about. If you have a few hundred thousand pounds to play with, and you are expecting to live for many more years, investing in property is probably the best idea. If you have that amount but do not expect many more years of healthy life, then spend it and enjoy yourself!!

If however, like most people, you have modest savings and a bit for a rainy day, just find the best-paying, easy access account or short term, fixed rate account for your money.

6. Box under the bed.

Know of cases where alternative investments had not worked out; also bearing in mind inflation. It is a question of how you assess risk and whether you are looking for security.

7. The background is interesting.

The interest rate is normally the sum of:
the rate of inflation % plus
a premium for the riskiness of the issuer...plus
an additional premium for the length (term) before the saver has access to the deposit.

Rates paid, in theory are also a function of demand by borrowers vs the supply from savers.

Today inflation is close to zero.

Government debt issues are called bonds or “gilts”.
Banks take “deposits”.
Company’s or Corporate issue bonds.

The Government is the safest, lowest risk borrower. It borrows at or below the expected rate of inflation. Today it pays zero to borrow... savers even pay the Government to hold their deposit, called negative interest. That is, it pays zero when inflation is zero, plus zero for risk.

Banks, the bigger the better, are usually the next safest borrower. Banks pay the Government to guarantee any saver’s deposit up to £85,000.

Therefore today with inflation close to zero, both Government and banks pay close to zero.

To the extent a saver wishes to receive more than rate of inflation (today zero), the saver must look for a greater than zero risk situation. For example by giving up the use of the funds for ten years, or accepting a higher credit risk of a corporate borrower’s bond.

A problem for smaller retail savers arises because corporate bonds are usually for larger amounts 1 million with a term of 5, 10 or more years... ie not for regular retail savers wanting some way to access funds quickly.

In the past, savers have been able to earn a higher rate, but rarely greater than the rate at which inflation erodes the RPI purchasing power value of the money deposit. In summary, if inflation was 6% and a bank paid 6% (or usually less), that is actually equal in real purchasing power terms to the zero % received today.

There are few alternatives for savers who do not have savings large enough to make paying a financial adviser realistic.

There are funds equivalent to money deposits and investments in bonds. These are available through financial advisers or also non-advisory online platforms such as Barclays Bank or Hargreaves Lansdown, which charge a small brokerage and account fee; but, provide no advice or guarantee. The saver must study and understand the risks of each fund. There are no guarantees.

Colin Bower
29 November 2020

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