In these COVID-uncertain times, having a lump sum to invest for the future is a significant advantage, and anyone would want to ensure that its value is not eroded over time. The political and economic outlook is uncertain at best and distinctly gloomy at worst. So how do you safeguard your assets with a UK investment that comes with minimal risk but offers growth potential?
These days a windfall can come from several avenues. Unfortunately, some may come into money from redundancy payouts which are affecting many industries amid the corporate failures and forced cutbacks of the post lockdown economy.
House sales can enable windfalls, as the housing market is looking increasingly uncertain and some people may wish to hold onto their profits before making a new purchase, inheritance may also be the source of an unexpected lump sum. There are various investment options for a modest windfall of £10,000 including bank deposit, bonds, equities, cryptocurrencies and gold.
The status quo – cash in the bank
At any time in history, interest rates have never been so low. Since the financial crisis in 2008, the Bank of England has been trying to recover some form of fiscal stability, but in the last decade has only managed to raise rates to 0.75, and is now contemplating negative interest rates.
Banks use the Bank of Engand interest rate to set their savings rates of interest, and currently savings rates are at their lowest level on record according to the Moneyfacts UK Savings Trends Treasury Report. For savings to avoid eroding their value, interest rates need to be higher than inflation, otherwise the cost of goods will grow faster than your money.
UK inflation is at a very low level (currently 0.5%, well below the government target of 2%), but many high-street savings accounts are still offering interest rates below even this level. If you shop around there are deals to be had.
Currently the best savings rates for easy access accounts is 0.75% from Atom, although UBL offers a 1.5% interest rate for fixed savings of five years which means leaving your windfall untouched until 2025. If inflation rises in that five-year period though, your windfall will be worth the same or less than today.
Is the ISA a safe bet?
ISA’s are a better way to save because the interest is not taxed. However the rates for cash ISA’s are similar to normal savings accounts. Most offer rates below inflation and a few above, including an instant access ISA from Ford Money which pays 0.65% or a five-year fixed rate ISA from UBL paying 1.4%.
While fixed-rate savings and ISA’s pay a little over inflation, within those five years the government will be making every effort to lift inflation towards its 2% target, so money invested for the longer term may start to erode if inflation rises during that time.
For example, if you invested £10,000 in 2010, an average savings account that year earned 2.8% interest, but this steadily declined to just 1.39% in 2019. This means your windfall plus the interest you earn would be worth £11,927 at the end of last year. But according to the Bank of England inflation tracker, the same £10,000 worth of goods cost £12,919 at the end of last year, meaning your windfall would be eroded by almost £100.
By contrast, a £10,000 investment in gold at the start of 2010 would be worth over £17,000 at the end of 2019, and £21,000 now.
In addition to low-interest rates and wealth erosion, bank deposits and ISAs come with inherent counterparty risk. Failed Banks may be rare but they are not unheard of, and there have been several in the not-too-distant past.
The COVID-19 pandemic has caused seismic shocks to the financial system and mass redundancies, corporate failures and mortgage defaults are likely to follow when the government ends its costly bailouts. Economic growth has stalled and Interest rates are so low that there is little upside risk to leaving your money in the bank, and current share prices and market valuations suggest the downside risk is increasing.
Are Investment Bonds a safe bet?
Bonds have long been seen as a safe profitable investment, but in the current climate, these historical realities no longer hold true.
The main difference between gold and bonds is the interest paid on bonds and the absence of interest on gold. In the case of bonds, the interest isn’t likely to cover inflation and will result in a loss of purchasing power. In fact, if you’re looking to invest your money for five years or less you’ll have to pay the government for the privilege as bond yields are negative. The return on 10 year bonds are below even today’s ultra-low inflation rate meaning your investment will be eroded over time.
Bonds are seen as a ‘safe bet’ because the UK government is unlikely to default on its loan obligations (although the level of COVID-19 borrowing run-up over the last 8 months should give gilt investors pause for thought), but they are not currently likely to earn an inflation-busting return.
The Cryptocurrency investment bandwagon
Cryptocurrency is a risky investment. Over its relatively short but eventful history, the standard-bearer – bitcoin – has swung wildly from $1,000 to almost $20,000, plunged to $3,000 and has now climbed to around $15,000 amid US election uncertainty. This seems to indicate that investors looking to the cryptocurrency now may be late to the (very volatile) party. Ultimately, bitcoin tends to draw speculators and gamblers rather than buy-and-hold-minded investors whose main concern is wealth preservation.
In contrast to the highs and lows of cryptocurrency, gold can be quite boring. Most keep gold as a hedge in their portfolio, forgetting about it and almost hoping that it doesn’t rocket in value – as it’s usually a sign the rest of their portfolio is collapsing; but don’t mistake gold’s often-low volatility for a non-performing asset.
When economic and geopolitical conditions deteriorate, gold can be volatile when it needs to be. This year alone gold has touched its highest price in history, and still now is up 30% since the start of the year.
Gold is tangible and easily converted to cash when the need arises, two qualities lacking in bitcoin. It is also tax free if the windfall is invested in British gold coins including Sovereigns and Britannias which are recognised as legal tender and therefore exempt from capital gains tax.
Bursting the equity investment bubble
The COVID-19 pandemic has had a devastating effect on most of the world’s equity markets. The FTSE 350 is down 21% this year, and aside from some major Silicon Valley tech stocks, most equities have not emerged from the crisis unscathed.
Even if the summer lulled many into a false sense of security, the second wave and lockdown 2.0 have revived the chronic uncertainty that is affecting corporate performance. While government bailouts underpin balance sheets right now, there will come a time when the taps are turned off and many companies will suffer.
The UK property investment market
The UK property market got a shot in the arm from the stamp duty holiday and a boost from the short-term hiatus during lockdown, but when the full impact of the COVID-19 pandemic becomes clear, redundancies and economic contraction will take its toll.
Meanwhile, the government is piling on debt to maintain some economic stability but the repercussions of this profligate spending will be felt for years to come in the form of inflation and tax liabilities.
The stock market is a risky investment amid continued COVID-19 uncertainty and both banks and bonds offer very little in the way of investment growth.
The Gold Standard
Gold thrives on uncertainty, as a safe-haven asset with intrinsic and tangible value, demand has grown as the unprecedented events of 2020 unfolded. COVID-19 risks remain, and the very real uncertainty of Brexit looms. If you want to invest your windfall in a safe asset that grows in difficult times, now is the time to buy gold.