This savings account pays 5.76% for five years – experts say buy shares instead

Victoria Scholar from Interactive Investor on long-term investing

Many will be sorely tempted. Last year stock markets were in meltdown, with the US S&P500 plunging 20 percent, while New York’s tech-focused Nasdaq crashed by a third.

The US has picked up this year but its success is based on just seven mega-cap stocks that have been boosted by the current hype surrounding artificial intelligence (AI).

The UK’s benchmark FTSE 100 has been really disappointing, falling 3.87 percent since January.

This isn’t a one-off, either. Measured over five years, the blue-chip index is down 5.14 percent, although investors should still be in profit thanks to dividends.

Investors expect a premium performance from putting money into shares, because of the added risk.

Yet unless they’ve struck lucky with a runaway stock like US chipmaker Nvidia, which has skyrocketed 197 percent this year, many will feel frustrated.

Instead, cash is king again.

It’s now possible to get a two-year fixed-rate bond from challenger bank FirstSave paying an incredible 6.15 percent a year.

Savers have been dreaming of returns like these since the Bank of England slashed base rates almost to zero after the financial crisis.

Finally, they are reality.

Savers who are able to lock away their money can get 5.76 percent a year all the way to 2028, from United Trust Bank’s market-leading five-year fixed-rate bond.

It’s the clear winner in this sector, with second-placed RCI Bank UK paying 5.55 percent over the same five-year term.

Savers can open the United Trust Bank bond with a minimum £5,000, or pay in up to £1million if they’ve got it to hand.

Inflation and interest rates are likely to have fallen significantly in the final years of the bond, potentially giving savers an inflation-busting return.

The minimum £5,000 deposit should be worth £6,616 after five years, a handsome gain of £1,616.

It’s not hard to see the appeal it you don’t need access to your money in that time.

The savings interest is guaranteed and so is your capital up to £85,000, under the Financial Services Compensation Scheme.

By contrast, the returns on shares are never guaranteed.

Yet Zoe Gillespie, investment manager at wealth manager RBC Brewin Dolphin, says most people should continue to invest, despite today’s high savings rates.

Leaving long-term savings in cash can still backfire. “While you can pick up relatively attractive rates, few accounts match current inflation rate.”

With inflation stuck at 8.7 percent in May, this is certainly true. Even FirstSave’s 6.15 percent rate is well below that.

Easy access savings accounts are even further behind, with Shawbrook Bank’s best buy deal paying 4.35 percent.

Gillespie says if returns on cash are not matching inflation, your money is losing its spending power in real terms. 

Equities, by comparison, have historically managed to beat inflation, provided you hold them for the longer term.

Over rolling 15-year periods, the benchmark US Dow Jones index has returned 143.2 percent on average, easily beating inflation at 101.26 percent.

Stock markets may not losing out inflation today, but that should soon change as consumer prices peak and investor confidence recovers, Gillespie added.

Obviously, as an investment adviser, Gillespie wants us to buy shares rather than put money in the bank.

Yet she’s right. History shows that shares deliver superior performance to cash over the longer run, albeit with great volatility along the way.

It’s still the best home for long-term retirement savings.

Yet today, cash offers much tougher competition, and that has to be a good thing.

The stock market has to work much harder to prove its worth, and so do investment managers.

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