Over the next year the Government will be introducing a raft of new flexible savings measures to incentivise people to start stashing more cash. However, while these new measures could help to encourage people to invest more money, there is also the possibility that many could throw caution to the wind and opt for more risky savings strategies.
Research carried out by Yorkshire Building Society found that many respondents are planning to start or increase saving when the new measures come into force: 42% of respondents stated that they will start to ramp up their savings when the new flexible ISA rules come into play in the autumn, while another 47% said that they will boost their savings pots when the tax-free allowances are introduced in April 2016 (basic rate taxpayers will be able to earn up to £1,000 tax-free in savings, while higher-rate taxpayers will be able to earn up to £500).
However, while it is certainly good news that more savers are likely to widen their savings horizons, there are fears that this could lead to costly risk-taking. Of those surveyed, one in two said that they believed the new rules gave them a licence to take more risks with their money, while another 10% said that they were definitely going to take on more risk once the new measures are introduced.
These riskier investments include putting money into the peer-to-peer (P2P) market, but despite more savers beginning to weigh up this option, the research revealed a worrying lack of knowledge about the sector. Indeed, only 42% of those questioned said that they were familiar with the term, while a staggering 60% of respondents were unaware that investments in this sector do not fall under the protection of the Financial Services Compensation Scheme (FSCS).
Another worrying finding was the unrealistic expectations of savers. It found that savers and investors were chasing annual returns of 5.30% on average, even though savings rates are currently at all-time lows. One in three of those questioned held hopes of even higher returns of 6.00% per year over five years.
It is perhaps little wonder, then, that financial advisers are concerned about the changes and the repercussions they could have on savers. Around 70% of advisers questioned said that they believe their clients will want to investigate riskier savings strategies after the changes, which means that a greater level of knowledge of the benefits and potential losses will be needed.
"The Government is helping to encourage saving and investment with new rules, and it looks as if it will be successful," commented Andy Caton of Yorkshire Building Society. "[However,] providers need to match that ambition by helping to encourage responsible saving as there is a genuine threat that [this] enthusiasm will be damaged if people are exposed to unnecessary risks they do not understand."
It can be all too tempting to rush out there and invest in something that promises big bucks, but if you don't understand the potential risks involved, then you could end up losing more than you expected. If a riskier scheme catches your eye, or you want to explore your options, the best thing you can do is to talk to an independent financial adviser. They will weigh up the pros and cons of different investments and inform you of the risks involved. This way, you can make a balanced decision.
If you do fancy taking on a bit more risk, you may like to think about stocks & shares ISAs. These accounts may give you a good return, although you must bear in mind that you can lose money as well as make it. Whatever you decide to invest in, make sure you weigh up the risks and benefits first to see if it is something that suits you.
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