Keeping your money safe: how risky are these popular financial products?

From opening a savings account to buying bitcoin, not all investments are equal when it comes to risk. Here’s what you need to know …

If you want to make your money work harder, there are plenty of financial products that can help. But you’ll find that to get the best returns from your cash, you have to be prepared to take risks. What you don’t have to risk is losing your money if a financial institution goes out of business. Provided a firm is authorised by either the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA), the Financial Services Compensation Scheme (FSCS) will – within limits – compensate you for any loss. So how risky is …

Opening an easy-access savings account
Incredibly low risk and a suitable home for cash that you may need to get at in a hurry. However, most easy-access savings accounts don’t pay enough interest to keep up with inflation. That means that over time you risk the value of your savings falling in real terms or, to put it another way, your savings won’t buy as much as they used to. However, there’s almost zero risk of losing your money if the bank, building society or credit union goes belly up. That’s because up to £85,000 in a sole account – and £170,000 in a joint account – is protected by FSCS.

Going for a fixed-interest savings account
There’s less of a risk that inflation will eat into the value of your savings since a lot of fixed-interest savings accounts pay rates of interest that will keep pace with inflation. The latest figures from December 2018 show the consumer prices index is 2%; several fixed-rate accounts better that rate, but only if you’re prepared to leave your savings untouched for at least one year; leaving them untouched for up to five years will unlock even better rates of up to 2.6%. And there’s the downside. You have to tie your money up for sometimes quite a long period of time. If you do access your savings before the fixed-term is up, you risk forfeiting interest. However, as with other savings accounts, FSCS will step in if there’s a risk of your losing your savings (as above).

Investing in the stock market
Much riskier than a savings account, investing in the stock market means seeing the value of your investments go up and down – and potentially down and out if you have shares in a company that goes bust. However – and past performance is no guide to the future – historically, money invested in the stock market has tended to go up more over five to 10 years than money in a savings account. The riskiest way of investing is to buy shares in just one or only a handful of companies. It is less risky, according the independent Money Advice Service, to spread your risk across lots of different investments by using unit trusts and OEICs (open-ended investment companies). These are professionally managed collective investment funds, so you get the expertise of a fund manager who chooses what to invest in. However, fund managers will have different approaches to risk, so it’s important to get professional advice before buying in. A compelling reason for investing in a collective investment fund is that if the firm running the fund goes out of business, FSCS will compensate for losses of up to £50,000 per person per firm (£85,000 if the firm goes bust after 1 April 2019). This also applies to funds held in a stocks and shares Isa (individual savings account), which is the most tax-efficient way of investing up to a maximum of £20,000 each tax year.

Taking out a pension
This involves the same risks as investing in the stock market except that you can’t get at your cash until you’re 55. There is the bonus of tax relief on pension contributions, which is like a government bonus paid on top of your contributions. However, pensions have a different compensation limit to investments. If a pension claim relates to an annuity or life cover product provided by an insurance company that has failed, FSCS can protect up to 100% of the value of a claim with no upper limit.

Taking out a lifetime Isa
If you’re prepared to wait until you are 60 to get your hands on your cash, the alternative to a personal pension is a Lifetime Isa. However, you can access your savings if they will be put towards the purchase of a property costing £450,000 or less. If the Isa is cash-based you’ll get the same protection from FSCS as with savings accounts. If it’s a stock-market-based Isa, you’ll get the same protection as with investing in the stock market.

Investing in cryptocurrencies 
Entirely at your own risk. Reports of huge profits made from cryptocurrencies, such as bitcoin, may make investing look a very attractive option, but you have to be willing to lose any money that you put into it. According to Brean Horne of Which? Money: “Bitcoin and other cryptocurrencies aren’t currently regulated by the FCA and there also isn’t any compensation from FSCS, so if things go wrong, you stand to lose your entire investment.” She adds: “If you lose your [cryptocurrency] wallet or it gets stolen, there is no way of getting your money back.”

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