Playing it safe can be a risky

Contrary to popular belief, savings accounts aren't always a 'low risk' option and could even be seen as a risky choice for long-term savers, says Jonquil Lowe, author of Save and Invest, a new Which? essential guide.

In the wake of the Northern Rock crisis, falling property prices and a volatile stock market, many people are looking for 'risk-free' options for their savings. But the book explains that by doing so, they may lose out by thousands of pounds in the longer term.

Although there is little or no risk that people will lose their money in a savings account, it won't grow by much more than inflation, and may even grow by less for higher-rate taxpayers. Indeed, if inflation was 4% a year and you invested in an account paying gross interest at 6.4%, higher-rate taxpayers would get a return of 3.84% after tax, which means their return lags 0.16% behind inflation. Moreover, returns from savings accounts are generally too low to achieve major long-term goals, such as saving for retirement or paying off a mortgage.

Lowe argues that people planning to save for longer than ten years should include 'higher risk' options, such as shares, and spread their savings across a number of assets to manage risk. Although there is no guarantee that savers will get back their initial capital, by taking a more balanced approach and doing their homework, there is potential for a higher return.

"There is no such thing as risk-free saving. Even sticking cash under the mattress is a fairly risky strategy, as your capital will be seriously eroded by inflation over time.

Lowe makes the point that for short-term savers, a cash ISA or other high-interest savings account is a good option. But for those savers who are looking at a longer period of time and are willing to be a bit more adventurous, other options could give a greater return.