Cash in wallet

When cash is not always king

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Considering the economic turmoil caused by the Coronavirus pandemic, 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 peace of mind, but there are unseen risks to holding high levels of cash - inflation.

The rate of inflation has increased sharply from 1.5% to 2.5% (at the time of writing) - the highest it has been for nearly three years! This impacts us all. Rising inflation obviously represents a challenge to savers, who must at the very least aim to beat it to prevent their money from losing value in real terms. The current challenge is made even trickier by the fact that current savings rates are so low and it is virtually impossible to find a deposit-based account that can beat inflation.

There is also another risk to holding cash. There are 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 license 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 in '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 some of the news we regularly hear 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 for the medium to long term, for those who can afford to do so, 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. We have produced “Our Guide To Investing” to help you understand, whatever your knowledge and experience, the principles of investing to allow you to make informed decisions. You can download the guide here.

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 brian.mcnicol@armstrongwatson.co.uk

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The deadline for July 2021 claims is 16th August 2021. If you require our JRS team to submit your claims please send them to jrs@armstrongwatson.co.uk by 11th August 2021. For details on the changes to the scheme visit our CJRS page.