Interest rates are low and the Bank of England has signalled that it expects them to stay low for at least the rest of this year. After NS&I cut its interest rates last autumn, the commercial banks swiftly followed with rate cuts of their own. Most instant access accounts now pay under 0.2% and even a 90-day notice account pays well under 1%.

Clients regularly ask us: What can I do? Most importantly, we urge you not to confuse returns ON your money with return OF your money. Call us to discuss this key difference and what it means for you.

Investments, with their associated risks, deliver returns ON your money. Returns from investments are highly variable and can be relied upon only if you hold for periods of five years or more. But with money that you are likely to need within a few years, it is the return OF the money you should be concerned about, not whether you get 0.5% or 1% interest. Placing money in instant access or term deposits may earn a modest sum in interest, but that’s not why you put it there. You put it there for safety and access when you need it, which is why we suggest you avoid anything that is not covered by the UK Financial Services Compensation Scheme, whose current limit is £85,000.

Last Autumn we reported on NSI’s drastic cuts in the interest rates payable on their products like Income Bonds – which is now paying just 0.1% annual interest! But the main banks are just as poor- none of the High Street banks pay more than 0.25% on instant access accounts. Even a 90-day notice account pays well under 1%.

The Bank of England’s Base Rate is stuck at 0.1% and seems very unlikely to be increased in 2021. All sterling bank account interest rates are ‘priced’ off Bank Rate, and with demand for credit low (apart from that underwritten by the government), banks do not need to attract deposits to fund new loans. So the current position is unlikely to change any time soon.

Most people tell us that they don’t want to take risks with their cash, yet many are prepared to put money into accounts with firms they have never heard of, or in ‘peer-to-peer’ lending or other arrangements that are not covered by the UK compensation scheme. As a result they can end up taking more risk than they would with normal stock market investments. We recommend that you ensure the return OF your shorter-term savings, and rely on investments for longer-term returns ON your capital.