With recent industry figures showing UK savers set aside billions more in personal savings in the first quarter of 2021 compared with last year, investors throughout Britain are scouring alternative routes to maximise their returns with surplus disposable income.
Figures released by the Office of National Statistics (ONS) in June 2021 showed the UK household savings ratio (the amount invested into household savings as a proportion of household income) increased to 19.9% in Q1 2021 - a 3.8% increase from Q4 2020 and the second highest figure on record.
Whilst 2020 was recognised largely for the challenges it posed on businesses, individuals and economies alike, a silver lining of the predominantly testing period has appeared to be a strengthened financial resourcefulness noticed among the UK’s savers.
With British households estimated to have accumulated over £200 billion in “excess savings” since the start of the pandemic, the figure now lies £5 billion higher than the expected level set by the ONS.
But in a present day Britain still “bouncing back” from the impacts of the pandemic, adversity has birthed opportunity, and some experienced investors are considering realigning their investment strategy as a result of rising personal savings and an abundance of opportunities for further growth.
Realising the relationship between saving and investing
The close correlation saving and investing fosters has long been acknowledged across the financial sector, and given the UK’s recent boom in personal savings, has gained particular attention in recent months from experienced investors looking to capitalise on it.
Put reductively, the basic formula follows the idea that when a population accumulates surplus savings, surplus investments follow.
Though some economists have different takes on the theory’s many intricacies, the idea that increased personal savings breeds higher disposable income and thus promotes a more flexible, proactive approach towards capital investment is one that is widely accepted.
And as we approach 18 months since the start of the pandemic, following a 2020 that saw households deposit three times as much in personal savings than the year before, and a 2021 with the second highest household saving ratio recorded to date, the age old predicament of “save or invest?” hasn’t been considered in such numbers in decades.
With a host of key industries such the UK tech sector having already witnessed their highest ever level of venture capital investment on record in 2020 (£11.3bn) - should savings continue to grow post-pandemic - this fundamental relationship between saving and investing could promote a 2021 characterised by fruitful investments and a re-energised private sector.
Assessing the varying degrees of risk
Whether an investor’s goal is to maximise returns or to build up steady savings, before selecting which saving or investment method is best suited to their portfolio, it can be useful to asses a range of differentiations the pair possess to ensure the most suitable route is chosen
Where with personal savings, savers typically deposit into low risk bank accounts offering minimal interest rates and less capital growth (often in the form of variations such as Cash ISAs), investments as a whole typically take on a higher risk profile with an increased potential for higher returns and - in some circumstances - a range of tax benefits.
Where it’s crucial to outline this sense of security savings products offer those not willing to harbour higher risk levels, the less effective capital gaining abilities usually associated with them mean that for experienced investors looking to maximise surplus disposable income in the wake of the pandemic, sole focus on savings accounts may dispel a lucrative opportunity.
Just this year the Bank of England stated that interest rates would remain at the historic low of 0.1% from which they have remained since the beginning of the pandemic in March 2020.
With a clear effect on savings accounts, the low has marked a clear demise in the buying power of capital as inflation continues to outstrip interest as some providers continue to offer this baseline interest rate.
But with the level of capital deposited into personal savings having grown considerably since that period and the level of disposable income available to investors across the UK thus bolstered, many predict a shift in focus towards, higher risk, higher return, investment options could be expected as high earners, especially, continue to lose confidence in savings providers.
Selecting the most appropriate route
When considering new routes for saving or investing, assessing a range of alternative methods from either side can play a pivotal role in ensuring maximum alignment with both short term and long term financial goals.
A process that may be particularly fresh in the minds of experienced investors especially, (following the recent savings spike and injection of innovation which contributed to mirrored highs in UK savings rates and venture capital investments alike in Q2/3 2020) tax efficient investments can serve as a particularly appropriate vehicle for bridging this gap between nurturing personal savings and realising significant investment growth.
Often not desiring investors to make dramatic shifts towards very high risk, volatile asset classes such as global small cap equities or cryptocurrency, tax efficient investment opportunities could be highlighted as a particularly appropriate middle ground alternative for individuals looking to marry the merits of investing and saving.
Renowned especially for their capital shielding abilities and generous tax advantages, tax efficient investments are not only a popular choice for investors looking to minimise risk, but for high earners looking to protect their capital and investors planning to save for later life as efficiently as possible.
Consequently, by comparing traditional savings routes with popular tax efficient investing routes, experienced investors faced with the predicament of whether to “save or invest” excess capital may find a comfortable middle ground between the two by diversifying their portfolio with a number of each.
Popular personal savings routes
Popular tax efficient investing routes
Easy Access Savings Accounts
Otherwise known as instant access accounts, these are simple bank accounts that allow savers to deposit and withdraw freely at any time.
Where they can be an effective, basic tool for saving capital flexibly, they currently offer particularly low interest rates, often between 0.01% to 0.5% APR.
Part of the ISA family, Innovative Finance ISA (IFISA) is an alternative investment tool that can be used to help facilitate peer-to-peer loans in everything from property to green energy to business loans.
IFISAs are often used in conjunction with fixed term bonds that allow investors to invest their money for a set period of time in exchange for interest repayments on their investment, usually paid either quarterly or at maturity.
Though these rates are not always guaranteed and thus do promote some level of risk, the interest rates available, which are often in the 5 to 8% range, far outweigh traditional saving options.
Notice Savings Accounts
Unlike many other savings methods, notice accounts require savers to give an agreed notice period to the bank before they wish to withdraw.
Varying amongst providers, the notice period can range from 30 to 120 days and generally requires a minimum initial deposit of at least £1,000.
Though the withdrawal notice and minimum deposit make these Notice Savings Accounts less convenient for some, they can be accompanied by higher annual interest rates of up to 0.8% APR.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are sibling investment schemes, both of which act as a bridge between private investors and early stage SMEs at different stages of growth.
Each scheme can help facilitate the provision of venture capital in exchange for an equity stake and a host of generous tax advantages.
Offering income tax relief of 30% and 50% respectively, capital gains tax exemption, loss relief and a host of other tax advantages, EIS and SEIS tax reliefs can help to manage risk, maximise returns and shield investor capital.
Though both schemes have the potential to generate considerable investment growth and high money-on-money returns, the risks of investing in early stage companies can be high.
Whilst operating in much the same way to other savings accounts, the interest rates on offer are typically higher than those offered by savings accounts such as Easy Access Accounts.
Though varying depending on provider requirements, most simple Cash ISAs offer interest rates below 1% APR, with all Cash ISAs allowing tax free interest on deposits of up to £20,000 per year.
Venture Capital Trusts
Similarly to the EIS and SEIS, a venture capital trust (VCT) facilitates private investment into early stage companies in exchange for equity.
Where the schemes differ though, is that a VCT is a holding company which invests into a pre-selected group of companies on the investor’s behalf, as opposed to EIS/SEIS whereby investors have individual autonomy over their investment split.
This means when an individual invests via a VCT, they invest into the holding company itself. And where this division of investment can mean more effortless portfolio diversification and spread of risk, the growth associated with VCTs is often less intensive than that of EIS and SEIS, with the trusts also not garnering the same extent of tax reliefs.
Striking the balance
Where some are of the polar belief that either saving or investing is the superior strategy for personal financial planning, it is often the case that taking a considered balance of the two can be most beneficial in achieving most individuals’ long term goals.
Where those focused on Cash ISAs and low risk savings may suffice for an individual looking for a guaranteed retention of their savings with very minimal growth, an investor that wishes to grow their investment pot and bolster their future savings may consider a mix of ISAs, Access Accounts and tax efficient investing to achieve their goals.
Regardless of life stage, disposable income level or growth strategy, it’s crucial that investors strike a balance between the investing and saving that best fits their goals and situation. And in the midst of growth of personal savings and venture capital investment across the UK, making this distinction timely could have abundant benefits for savers and investors alike.