Is investing still worth the risk with 5% interest available?
For money you will not need for a long time, the answer is usually yes. A 5% savings rate sounds like an easy win, but once you account for tax and rising prices, a higher earner can end up with almost no extra spending power. While investing comes with real risk, it has historically grown more than cash over a 10-year stretch.
Why 5% does not go as far as it sounds
If your savings grow by 5% but prices also rise by 5%, your money has not actually grown in value. What matters is your real return, which is how much your savings grow after tax and inflation.
Consider a £20,000 lump sum in a 5% fixed savings account. For a higher-rate taxpayer whose tax-free allowance is already used up, 40% of that interest goes straight to the tax office every year.
Once you subtract that tax and factor in inflation (currently around 2.9% a year) that impressive-sounding 5% is almost entirely wiped out. After 10 years, your £20,000 is only worth about £20,195 in today's money. That is less than £200 of actual extra buying power across an entire decade.
What the same money could look like invested instead
Unlike cash savings, invested money is taxed differently. You only pay tax on the growth when you sell, not every year.
Using a cautious estimate of investment growth, and after paying tax when sold, the same £20,000 could be worth between roughly £22,000 and £28,000 in today's money after 10 years. Exactly where it lands depends on investment performance, which nobody can know in advance.
This tool provides mathematical illustrations based on your inputs and general market assumptions. It does not constitute a personal recommendation or financial advice. Actual returns will vary and remember that investments can go up and down in value, so you could get back less than you put in. Tax rules depend on individual circumstances and UK legislation.
The risk does not go away
Investing is not guaranteed. To invest, you need to accept that historically there has been a 1 in 10 chance of underperforming cash over a 10-year stretch, and you could lose money.
The Barclays Equity Gilt Study tracked data back to 1899 and found that investing beats cash in about 90% of ten-year periods. That leaves a 10% chance where you would have been better off in the bank. Past performance is never a guide to what happens next, but it highlights the exact trade-off you make for the chance at a better return.
The house view
The Illora house view is that a savings rate should be judged on what it is really worth after tax and inflation. For long-term money, it is usually worth weighing a rate that barely keeps up with prices against a riskier option with a real chance of beating them. Do not assume guaranteed always means safer for money you will not need for years.
If you might need the money in the next few years, the certainty of a fixed rate is usually worth having. But for money you will not touch for 10 years or more, keeping it in cash can cost you more than you realise.
