Britons stash £2trn in financial institution accounts – however returns solely a 3rd of what they might acquire from investing

Britons have been hoarding cash in bank accounts in 2024, lured by higher interest rates and relative safety in a year characterised by political uncertainty.     

But while savers may have enjoyed more generous interest than has been available for much of the last two decades, they have missed out on bumper equity returns and risk tying themselves to falling rates.

Research from Janus Henderson Investors shows cash savings have swelled by £51billion so far this year to £2.05trillion, the equivalent of 80 per cent of the UK national debt.

Banks lift savings rates as central banks hike interest rates rise to encourage customers to maintain deposits, but the value of cash is eroded by inflation over time and savers can often find better returns elsewhere.

Interest on cash has returned less than a third of that returned by global equities this year, according to the asset manager’s research, with savers missing out on £165billion of returns.

Over the last 30 years, cash and interest has lagged inflation by 3.4 per cent, while global equities have risen sevenfold in real terms.

Dan Howe, head of investment trusts at Janus Henderson Investors, said that while high interest rates and market uncertainty make cash savings ‘a more appealing offer’, Britons’ money ‘could be doing more for them’.

Separate data form the Bank of England last week showed Britons piled more than £20billion into cash savings in October alone, marking a non-Covid-era record high.

Laura Suter, director of personal finance at AJ Bell, said it was ‘likely that the uncertainty around the Budget and potential tax changes sparked nervousness’, noting the month also saw investors taking profits on their portfolios.

She added: ‘The challenge for the nation now is to work out what to do with those cash levels. We know that cash is not a great place for long-term money, as inflation eats away at its spending power.

‘So, savers need to think about whether to put their money into markets, keep it in cash as a tactical move, or just spend it now.’

Janus Henderson’s data shows just £1 in every £6 of newly deposited cash has been allocated to fixed-term accounts, thereby leaving investors exposed to falling interest rates.

Recent BoE interest rate cuts have already weighed on saving rates, which experts expect to continue to fall in the coming months.

Janus Henderson’s Howe said: ‘Cash savings are eroded in real terms by inflation and, as we have seen recently, are mostly sat in instant access savings accounts where interest rates continue to decline.

‘Beyond the recommended cash buffer, there are many opportunities for us to put our cash savings to work for us rather than letting them languish.’

Better options for income?

Analysts at Morningstar suggest bond markets offer a relatively low risk alternative to over-saving, which ‘has historically led to lower long-term portfolio returns compared with nearly all other fixed-income asset classes’.

They added: ‘The benefits of holding cash fade in a world with falling global yields. By definition, cash cannot offer any price appreciation when rates decline, unlike longer-term bonds.

‘This leaves income as the only return contributor for cash—a factor that will decline as [central banks] continue to lower rates. Now is a good time to move from cash to longer exposures.’

Similarly, analysts at Invesco said: ‘As we head into 2025, we believe the case for the [fixed income] asset class is the strongest it has been for years, with the potential peak in interest rates offering the opportunity to lock in a higher level of income for the years to come.’

Below, experts provide their top fund picks for income-seeking investors.

Darius McDermott, managing director, FundCalibre:

‘Artemis Global High Yield Bond fund is a high-conviction fixed income portfolio investing in 60-100 high yield issuers across the globe. Managers David Ennett and Jack Holmes look to increase the value of shareholder investments through a combination of both income and capital growth.

‘To do this they focus on the under-researched, inefficiently-priced opportunities further down the high yield spectrum, while their global approach looks to unlock opportunities and insights that regionally-focused peers may miss.

‘Their approach of focusing further down the index has allowed them to consistently find hidden gems with a strong upside, helping them to outperform. They are also supported by one of the strongest teams in the asset class.’

‘TwentyFour Dynamic Bond pays an attractive yield and is managed with an emphasis on credit risk to ensure protection of investors’ capital and income wherever possible.

‘The fund has a very flexible approach in order to take advantage of changes in market conditions. It may invest across the whole range of fixed interest assets. The income produced is usually one of the highest in the sector, but will fluctuate as investments and market conditions change.’

Josef Licsauer and Alan Ray, investment trust research analysts at Kepler Partners:

‘Japan is often overlooked as a source of income, but as its dividend culture evolves, driven by corporate governance reforms, CC Japan Income & Growth (CCJI) emerges as a standout option for investors.

‘Whilst pursing strong total returns, considering both capital and income growth as two key components, CCJI has achieved an unbroken track record of annual dividend increases since inception, achieving a compound annual growth of 8.5 per cent.

‘At the time of writing, the trust’s fully covered dividend yield of 3 per cent surpasses the TOPIX’s yield of 2.3 per cent.

‘We think CCJI offers investors an attractive income profile, aligned strongly with Japan’s ongoing corporate governance transformation, without sacrificing the quality or growth potential of its underlying holdings. For investors seeking diversified income sources outside traditional equity income markets like the US or UK, we believe CCJI is a compelling option.

TR Property (TRY)

‘Listed property REITs have had a tough time in a higher rate environment and trade on wide discounts and consequently offer high yields.

‘Recently, there has been a steady stream of REITs reporting that their properties have either risen, or at least stopped falling, in value for the first time in over two years, as the market begins to respond to rates coming down, albeit painfully slowly.

‘But with a wide range of REITs offering specialist exposure to particular sectors, it can be confusing deciding which one to choose from. Help is at hand though, because TR Property (TRY) is a specialist investor in REITs across the UK and Europe, giving investors a ready-made portfolio managed by an expert team.

‘TRY, which currently yields c. 5.0 per cent, invests for total return rather than pure income, but its dividend growth has far outstripped inflation over the 25 years or so that its current lead manager, Marcus Phayre-Mudge, has been at the helm.

‘While TRY itself does not trade on a particularly wide discount, currently c.8%, it owns many REITs that do, so an investor will still benefit if there is an eventual narrowing of discounts for REITs generally.’