Cash in wallet

When cash is not always king


National Savings & Investments (NS&I) have just announced significant cuts across their range of savings. From the 24 November Income Bonds, will to go from paying 1.15% monthly interest to just 0.01%. There are further dramatic reductions to the rates payable on the NS&I Investment Account, Direct Saver and Direct ISA’s. In addition there is also a reduction in the odds of winning in the Premium Bonds draw from December, the odds of winning anything in the draw will go from 24,500 to one to 34,500 to one, and the estimated number of total prizes won reduced by 1m. NS&I said that it had no choice but to act because savers had put away billions of pounds more than usual during the COVID-19 lockdown, whilst they were paying market leading rates, which left it in danger of breaching its government-mandated funding limit for the year.

Considering the current economic turmoil caused by the Coronavirus, some savers are perhaps understandably continuing to seek safe havens for their money. In times of trouble cash is traditionally seen as offering capital security over other assets namely, shares, fixed interest and property. However, savers still need to apply caution. Even in `normal` times some people hold high cash balances, perhaps to meet capital expenditure in the short term or just to provide extra piece of mind, but there are unseen risks to holding high levels of cash - inflation.

The Consumer Prices Index 12 month rate is currently standing at 0.2% (source - Office for National Statistics as at August 2020) and the base rate at an all-time low of 0.1% (source - Bank of England). However, whilst the inflation rate is at its lowest level for long time this is impacted with the health crisis and the measures to restart the economy such as the Eat Out to Help Out Scheme where the cost of eating out was significantly discounted. As we move further through this crisis inflation is predicted to rise again, with central banks continuing to stick to a conventional inflation target of 2%. Cash savings, as has been the case for a number of years now, are therefore likely to be eroded daily as typically rates of interest on cash savings, as demonstrated by the NS&I reductions, cannot keep pace with the cost of living. As a result this gap can have a serious long term impact on wealth.

There are also limits to the amount of protection holding cash for all other deposit providers bar the Treasury backed NS&I. The Financial Services Compensation Scheme (FSCS) offers individual account holders protection up to £85,000 (£170,000 joint account) if that banking/building society institution is unable to meet its obligations to investors.

For most savers this generally provides sufficient protection, but what are the options for clients holding in excess of these limits? They could simply spread their cash across a number of different institutions. Whilst this makes sense in theory, in practice it can be quite difficult, not least because many banks have different trading names but only the main deposit taking licence holder can provide the FSCS protection. For example if you hold accounts with Lloyds Bank, Bank of Scotland or Halifax, you would only be afforded one level of protection as Lloyds Bank is the principal holder. Likewise, between The Royal Bank of Scotland and Natwest.

So how can cash savers hope to bridge the gap? The answer may be to invest into `real assets` such as shares, fixed interest and property.

But is this a good time to invest? It`s all too easy to get caught up with the bad news we currently hear every day about financial markets. The key factor however is not about when to invest but rather the amount of time you invest for.

Many people believe that knowing when to buy and when to sell is the secret of successful investing. The truth is that no one knows with certainty when investment markets will rise or fall. Trying to time the investment markets is not only stressful, it is very seldom successful. Leaving funds invested usually produces the best returns.

When markets are volatile it`s a big temptation to put all your investments in the relative security of cash. It may seem like a safe haven, however as they say, a ship is safe in harbour, but that is not what ships are made for.

Armstrong Watson Financial Planning & Wealth Management, as well as providing Independent Financial Advice and personalised investment planning also offer a bespoke `cash management` service aimed at maximising interest rates by identifying the most competitive cash accounts, whilst ensuring clients` savings are afforded full FSCS protection.

For further advice, please get in touch with Brian McNicol on 0141 233 0724 o remail him at

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