I am 65 years old, recently paid off my mortgage and am receiving a National Health Service pension, although I still work part-time.
Now I’m wondering if I can make the rest of my money work harder. I have some savings that were boosted by the lump sum I received when I claimed my pension.
At the moment my money is in the account with 31 days notice and the local building society is paying about 2.5% per annum.
Tough decisions: Our reader, having received a lump sum from his pension, is wondering whether he should stick to savings or invest for a while.
Can I get more interest elsewhere, and should I lock some of the money in a fixed-rate account for several years?
Or should I invest part of the money – and if so, where? I’ve never invested before so I don’t want to do anything high risk and from what I understand the stock market is volatile at the moment.
Wouldn’t it be better to leave all the money in my savings account for now and think about investing in the future?
Ed Magnus from This is Money replies: An account with 31 days notice paying out 2.5% is by no means a bad bet compared to the rest of the market.
According to Moneyfacts, the average account with a notice pays 1.91%, so you are above the average rate.
Aldermore Bank is offering a slightly higher rate of 2.8% with 30 days’ notice. Other than that, there are no better options unless you extend the notice period to 90 days, for example.
It’s worth leaving some money in your existing notification account as a reserve fund to use as needed.
Most personal finance experts believe that this should cover three to six months of basic living expenses.
You can also transfer this reserve money to an easily accessible savings account so you don’t have to wait for a notice period every time you want to withdraw money.
The best offer with easy access, no limits, pays 2.81% so you can get a better rate than your current deal.
– Check out the best rates with easy access here
What you do with the remaining lump sum will depend on when you feel you might want to access those funds in the future.
For any money you might need over the next few years, it would probably be best to stick with savings.
Fixed rate savings offer the best return at present. The best 1 year fix is 4.4%, the best 2 year fix is 4.85%, and the best 3 year fix is 4.9%.
For example, if you invested £20,000 in the best two years, you would earn £1,987 in interest over that two years.
– Check out the best fixed rates here
However, if you have spare savings that you think you won’t need for five or more years, you should consider investing.
Yes, it has been a hot year for investors, but in the long run, investing tends to be more important than savings.
In fact, according to research by Janus Henderson, this will be one of only four years in the past 20 years that stocks have performed worse than money savings.
A bad year may turn off some nervous investors, but in the long run, it won’t hide the fact that investment outperforms cash in the long run.
Consumer Price Inflation at 10.1%: This means consumer prices are rising more than five times the BoE’s long-term target of 2%. No savings rate comes close to it
For example, £1,000 invested in the MSCI World Index 20 years ago would be worth £7,036 today compared to £1,391 in cash. The MSCI World Index is a stock index that represents large and medium-sized companies in 23 developed markets.
Even someone who invested at the most inopportune time before the most recent recession – in October 2007, before the global financial crisis – would have seen £1,000 in savings rise to £3,837 today.
According to Janus Henderson, cash deposited into a regular savings account would at the same time be worth £1,170 today.
We spoke with Mike Stimpsonpartner in the management company Saltus, Laura McLeanChartered Financial Planner from The Private Office, and Gavin Jonesgraduate financial planner at Old Mill for their advice.
Should they keep some money in their notifications account?
Gavin Jones says: It’s a good idea to keep some of your savings in an easily accessible account, or an account with a shorter notice, such as the 31-day account you currently have.
The interest rate you get on this account seems very competitive for 31 days’ notice.
This is essentially your “rainy day” fund that you can quickly access if any unexpected expenses arise or if you are unable to continue working for any reason and your NHS pension is not sufficient to cover your expenses.
Should you use a flat-rate screensaver?
Mike Stimpson says: It is possible to get higher interest rates than the 2.5% you are currently getting, especially if you are willing to tie your money up for a longer period – up to 4.9% per annum for three years in some cases.
However, it is worth remembering that these rates are still well below the short-term inflation rate.
Generally speaking, how long you block your money depends on when you might need to spend it.
In this particular case, if their NHS pension more than covers their costs, they can afford to tie their money up for a longer period and risk their money a little more.
Should they invest some of the money?
Laura McLean says: An investment should only be considered if you have at least a five-year horizon.
The markets can be volatile, as they are now, and the risk of loss is higher on shorter periods.
Cash is really the only source of money you may need access to during this period of time to avoid the risk of having to sell your investment when its value drops.
If you can keep your funds for more than five years, investing can give you the opportunity to grow above monetary returns and inflation.
Silent Killer: While interest rates…
Credit: www.thisismoney.co.uk /