Finance

Money and me: I'm saving money in lockdown – where is best to put my lump sum savings?

Millions of people have felt the financial impact of the coronavirus crisis – be that in the form of a pay cut or the loss of income altogether. However, with social distancing putting a stop to many ways of socialising, and commuting not currently being a requirement for many, some have reported finding themselves with more cash in their pocket each month.

Sarah Lord, chief client officer at Succession Wealth, said: “It is important to balance your short, medium and long term objectives and therefore I would encourage you to ensure that you have sufficient savings as an emergency fund first, by sufficient we would typically recommend holding at least six months expenditure in cash to cover unexpected expenses.

“If you already have this in savings, then the next step would be to look at putting your additional savings towards your goal of a property purchase.

“One of the most effective ways to save to get on the property ladder is through a Lifetime ISA (LISA); the LISA is designed to help with buying your first property or saving for retirement.

“Up to the age of 50 you can save up to £4,000 per annum into a LISA and the Government will add a bonus of 25 percent of your contribution up to £1,000 each year.

“You must be 18 or over and under 40 to qualify for a LISA. If you are able to save more than £4,000 per annum (£333 per month) then you could also save through a cash ISA in addition to the LISA.

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“The maximum which can be paid into ISAs in any one tax year is a total of £20,000 per annum, the £4,000 LISA limit counts towards this overall limit.

“A Cash ISA does not benefit from the government bonus in the same way in which the LISA does, but it still provides a very tax efficient way of saving as you do not pay any tax on the interest received and you are able to withdraw funds at any point.”

However, when the saver wants to buy their own home is something which could affect this financial move.

Ms Lord continued: “The timeframe for buying your property would have influence on whether you should hold your savings in cash or invest a proportion of them.

“Certainly, if you are looking to buy a property within five years it would be recommended that you hold all of your savings for this goal in cash, but if your time horizon is longer than five years it may be worth considering investing a proportion of your savings, with the aim of achieving higher returns than the interest available on deposits.

“However, this would mean that part of your savings would be subject to market volatility and you would have to be comfortable with the investment risk that you would be taking.”

David Macdonald, founder of financial advisory firm, The Path, also shared his thoughts with Express.co.uk.

He said “If you are particularly risk-averse, or it isn’t long until you plan on purchasing property, then my advice would be to go down the cash savings route as this avoids potential risk issues around fluctuations in the market.

“Also, taking out an Individual Savings Account (ISA) might seem tempting in order to receive a tax-free return but be warned – better interest rates often lie outside of these savings accounts and you would need to earn at least £500 as a higher rate tax-payer, or £1,000 as a basic rate tax-payer, before you would start to feel the ISA tax benefits anyway.

“So, depending on your circumstances, just a simple deposit account might be the right route to take.

“If you are prepared to take some risk in order to see a better ROI, then choosing to invest in a unit trust or stocks and shares ISA could see big benefits. The dividend yield on the FTS100 post-coronavirus is still a whopping 3.95 percent, which is about four times the deposit interest rate from banks.

“So, a better return is potentially available but only at the risk of capital fluctuations.

“At The Path, we find that millennials are horrified when they discover that their investments support industries such as fossil fuel extraction and tobacco.

“This often goes against their moral and environmental values – and to them, I would advise looking into impact investing.”

Meanwhile, Victoria Hicks, group director at The City & Capital Group, said: “The key point to note here is that you’re considering buying a property, which flags a potential short-term need for your savings – this means that any recommendation regarding surplus funds should focus on capital preservation and accessibility.

“This is likely to rule out investing any savings, as chasing an investment linked return poses risk to capital, especially in the short term.

“While savings accounts aren’t the most attractive option in the current climate, with interest rates threatening to fall even further, your priority should be taking care of the capital itself rather than seeking a return.

“It’s worth using a site such as savingschampion.co.uk to find the best account, rate and access level for your own personal situation.

There are fixed term savings accounts where you could receive a slightly higher rate of return, although typically monies are ‘tied-up’ for at least a year, dependent on the account, so if you don’t think you are going to purchase within the next year, a short term fixed rate account may be a better option.

“We would always recommend you ensure your savings are covered by the FSCS, to pay compensation if the bank or building society is unable to pay claims against it. The deposit protection limit is £85,000 per person per bank, building society or credit union.”

So, what about the saver’s pension contributions? This matter is something Ms Hicks addressed.

“In terms of your workplace pension, I’d advise remaining opted in,” she said.

“You benefit twofold as you receive tax relief on your contributions and your employer contributes too – meaning you double what you put in.

“Although tax relief is a great benefit which bolsters returns within a pension, I wouldn’t recommend investing any more at this time as it appears buying a property is the first priority and pensions are not accessible until at least age 57 under current legislation.”

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