Ways to Protect Savings from Interest Rate Cuts

Savings Protection During an Economic Recession

Jan 9, 2009

Savings protection during an economic recession is important. Interest rate cuts can mean that savings fall in real terms. Does a capital-protected FTSE tracker help?

The economic recession has affected all families, including those who save. Interest rate cuts by the Bank of England have left savers in a rather precarious position as, in many cases, returns are failing to even keep pace with the rate of inflation.

Tax Free Savings and the Individual Savings Account

Inland Revenue rules allow someone to put up to £7,200 in an Individual Savings Account. The full allowance can be divided equally between a cash ISA and a stocks and shares ISA. It is also possible to invest the full £7,200 in a stocks and shares ISA.

All Individual Savings Accounts represents a form of tax-free savings. This is of benefit to all taxpayers, but especially higher rate taxpayers. Those looking for long-term capital growth can choose to invest their money in a capital-protected FTSE tracker and avoid taxation completely.

Protect Savings from Interest Rates Cuts with a Capital-Protected FTSE Tracker

Overcoming falling interest rates with a capital-protected FTSE tracker is a smart move, especially as the FTSE 100 index is so low. Taking a 5-year view means that there is potential for full recovery. The returns are likely to be a lot better than for savings certificates, fixed-rate bonds and other interest-bearing investments.

Long-term Capital Growth from Fixed-term Bonds

All fixed-term bonds guarantee investors a set rate of interest in return for locking up money for a pre-agreed term. The longer funds are tied up, the better the rate of interest an investor is given. It is possible to aim for capital growth or opt for a monthly income payment.

Index-Linked Savings Certificates

People who are prepared to invest their money for at least a year can benefit from tax-free savings in the form of an index-linked savings certificate. They guarantee that savings keep pace with inflation so that it doesn't lose value in real terms. Income isn't known as interest rates are variable.

Fixed-Interest Savings Certificates

Fixed-interest savings certificates guarantee the payment of a set amount of interest over a fixed term. It works in a similar way to a fixed-rate bond, but they are a form of tax-free savings. Fixed-interest savings certificates tend to pay a lower rate of interest. Always compare the net rate of interest on fixed-rate bonds to fixed-interest savings certificates.

All of the above types of savings methods will help an investor fend off further interest rate cuts. Which option is chosen will depend upon how long an investor can afford to tie-up their capital. Consider a capital-protected FTSE tracker if able to invest for more than 5 years.

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