5 alternatives to savings accounts​

What's it all about?

This article's designed to help you:

• Think more broadly about your savings options
• Understand the risks and rewards of different ways of savings
• Build the best possible saving habits

When you set out to save, you’re making the strongest possible investment in your financial future. But, it will take more than just socking spare cash away. Job one is to dump those debts. The interest you owe on your borrowing will almost always mount up much faster than the returns on your savings, so killing off the debt will breathe new life into your finances. Once you’ve got those debts under control, you can start to look into your savings options. Here’s a basic run-down to kick things off.

Lifetime ISAs

If you qualify for a Lifetime Individual Savings Account (LISA), you could do worse than looking into getting one. The first thing to know about them is that their value can vary pretty widely according to how old you are when you take one out. At their best, they can actually make for a pretty decent retirement booster. You can open one from the age of 18, giving you a good, long run-up to make the most of it. If you’re over 39, on the other hand, you’re out of luck and need to look elsewhere. Watch out, though: even if you’re eligible to open a LISA, the interest rates aren’t high enough that you can afford to use one instead of a pension.

So, what are LISAs actually good for? One of the best answers is buying your first home. Here’s how the system works. You can pump up your LISA by as much as £4,000 a year, whether as an annual lump or by trickling the cash in whenever you can, until you hit the ripe old age of 50. As you save, the government will be topping your cash up by 25%, to a maximum of £1,000 a year. If you’re a first-time buyer, you can use your LISA cash toward your deposit - assuming the place you’re buying is worth no more than £450,000 and you’ve had your LISA open for 12 months.

If you’re not buying your first home and you’re under 60 years old, there’s a catch! Pulling cash out of your LISA will cost you 25%, basically clawing back all the bonus money the government gave you. They’ll ignore that rule if you’ve got under 12 months to live, though. If you die with cash still in your LISA, it’ll become part of your estate. Your beneficiaries won’t get charged the 25% penalty, but the account won’t be considered an ISA anymore so it’ll count toward the threshold for Inheritance Tax.

Basically, this can be a terrific option if you’re young and saving, either for your first home or to boost your retirement income alongside a pension. If that doesn’t sound like you, though, there’s a good chance you’d be better off looking elsewhere.

Stocks & Shares ISAs

Stocks & shares ISAs are another kind of savings account, but instead of paying basic interest on your balance, the money’s invested in things like equities, bonds and investment trusts. There’s a hard-and-fast limit on how much you can put into your ISAs, coming to £20,000 per year. That total covers any and all ISAs you have, but any gains you get on that amount come free of tax. So, for instance, if you’ve already pumped £15,000 into a cash ISA in this tax year, you can’t then put more than £5,000 into a stocks & shares one without going over the limit.

One of the main reasons why stocks & shares ISAs are so popular as an alternative to cash savings is that the potential for growth can be pretty high by comparison. When interest rates are generally low, for instance, having your savings invested in stocks and shares can really make a difference. Of course, the down-side of saving this way is that the equities your cash has been invested in can go down in value, meaning you could stand to lose your entire stash if the worst came to the worst. Even if you don’t lose everything, you can have still a lot of value wiped off your investment if your stocks crash. Massive economic shocks like the COVID-19 pandemic can potentially take years to crawl out of. In the meantime, you could be stuck with less money than you started with.

It’s worth remembering that investment really isn’t a get-rich-quick game. Over the longer term, stock market investments will still tend to perform better than most kinds of cash savings. You can also manage the amount of risk you’re shouldering by spreading your investments out over a wider range of stocks and shares. You can never eliminate every trace of risk, but a few smart decisions made early on can set yourself up with the best chances of success.

Fixed-rate cash ISAs

If you’re not going to need access to your savings cash for a while, you might consider opting for a fixed-rate cash ISA. These accounts pay out a pre-determined rate of interest over an agreed term. The interest you’re offered will probably be higher than you’d get with something like an easy access ISA, but you’ve still got to consider whether inflation will mean you’re actually losing money overall.

Opening a fixed rate cash ISA is pretty simple. You load it up with money up to a set limit, with your interest coming in either at the end of the fixed term or on a yearly or monthly schedule. The actual interest rate you get with one of these ISAs can vary according to the length of time you’re happy to lock away your cash. Typically, longer terms offer better rates, but the differences can be pretty minor.

Obviously enough, putting your savings into a fixed term ISA means it’s a lot less easy to get hold of it in a hurry. If you take your cash out before the term’s up you can find yourself hit with penalties. Also, since your interest rate is fixed when you open the ISA, you won’t see the benefit if rates go up more generally. Even if you rate’s decent, as we mentioned earlier, if it’s outpaced by the rate of inflation you’re going to find your savings dropping in real-world value. When inflation’s high, even the top interest-paying ISAs are going to struggle to keep up with the rising cost of living.

So overall, fixed rate cash ISAs are a pretty stable choice if you’re not ready to risk your money on a stocks & shares one. When the financial climate’s in your favour, they pay out reasonably well. On the other hand, when interest rates are low and inflation’s high, they really don’t stack up against other options.

Bonds

Taking out a bond is like making a loan to a business or government (government bonds are also known as gilts). In return for your investment, you get a steady income in the form of interest payments for the duration of the bond. At the end of the term, you get your initial cash back. In terms of risk, bonds are generally considered pretty safe investments to make. As usual, though, that does tend to mean that the returns are comparatively lower. If you don’t feel like going it alone in a fixed-income bond, you can buy into collective investments like unit trusts.

It’s worth stressing that investing in bonds is very different from buying shares in a business. All you’re doing is lending the organisation your cash in return for interest payments. You won’t get a stake in the company itself this way. On the other hand, bonds can be a safer bet if business goes badly. If the company were ever made insolvent, for instance, you could still lose your money like a shareholder. However, since you’re counted as a “creditor”, you stand a decent chance of getting at least a big chunk of your investment back.

You can buy company bonds from the London Stock Exchange’s Retail Bond platform, with a minimum investment of just £1,000. For gilts, you can go straight to the government’s Debt Management Office.

Gold

Yes, it’s possible to invest in gold, even without the resources of a James Bond villain or a greedy dragon. Is it actually worth it, though? It turns out the answer depends very much on what you’re hoping to achieve - and how long you keep your money invested.

Over the really long term - and we’re talking about the last 30 years or so here – gold investments don’t really have any kind of edge over putting your cash into the stock market. In the shorter term of around 15 years, though, gold has outperformed stocks and shares investments pretty convincingly. Here are a few numbers to chew over:

• From 1990 to 2020, the Dow Jones Industrial Average (DJIA) rose by 991%. Gold prices trailed way behind at only 360%.
• Narrowing our focus down to the 15 years from 2005 to 2020, though, we see the DJIA only rising by 153%, while gold is still up by 330%.

The DJIA is considered to be a pretty decent snapshot of the entire US economy, making it one of the most well known stock market indexes. When times are tough and the markets are volatile, gold often becomes a much more attractive investment option. It just doesn’t “twitch” up and down in value with general market prices. 2020’s a good example of this. Gold prices flew up to record levels in July that year, while stock market values plummeted. The same thing happened in 2008 when the financial crisis happened. The down-side to that stability, though, is that when the markets are going strong, the price of gold can often level out while other investments shoot up.

Another thing to realise about gold is that it isn’t going to give you a regular income the way other types of investing can. The value of your gold investment is determined entirely by the price of gold itself. Assuming you’re buying actual gold rather than investing in gold-related businesses, you’re also going to be looking at storage and insurance costs. You can read more about this in our article, “An Intro to Gold Investing for Beginners”.

So, gold can be a decent back-up plan to keep your money’s value when other investments turn out to be less reliable. It’s more about ensuring you don’t lose cash than making you more of it, though.

Keep checking back here for more money saving tips and updates. We’re experts at saving you cash and we’re always here to help. That’s the reason why you’re better off with RIFT.

RIFT Roundup: what it all means

• ISA: Tax-free Individual Savings Accounts.
• Bonds/Gilts: Fixed-term loans made to companies (bonds) or governments (gilts), paying out interest.
• DJIA: The Dow Jones Industrial Average. A well respected stock market index used to measure the health of the US economy.