Over the longer term, cash deposits will tend to be eroded, and for those willing to take some risk with their capital, it is likely that other investments will generate better returns, though of course the risk is that investors could get back less than they started with.
So for those who cannot afford to take any risk with their capital cash is still king, but not all cash deposits are equal.
If we put aside risky strategies like peer-to-peer lending, which in no way should be considered like cash (your capital is at risk if the individual or institution you lend to does not repay the debt), but is often marketed as such; then the most common recipient of cash deposits is a bank or building society.
Even these institutions are not 100% secure, as although the chance of a “high-street” bank reneging on its obligations is low, it cannot be ruled out, and the Financial Services Compensation Scheme offers protection up to £85,000 per person, per banking license – this covers many, but clearly could be inadequate in the unlikely event of a banking failure where a depositor has more than this limit.
National Savings and Investments (NS&I) remains my preferred institution where cash is required for access, security or “insurance” (in case of illness, redundancy etc.) reasons. Having announced, and then withdrawn a rate reduction, the rates are highly competitive.
There are three main offerings from NS&I for significant savings (principally in excess of the annual ISA limit – note all rates variable, correct at 22nd May 2020):
- Premium Bonds – which is paid as a lottery, and has an expected tax-free return of 1.40%, though due to the uncertain nature of prize winnings the average bond holder will expect to receive slightly less. The maximum holding is £50,000 per person.
- Income Bonds – which pay 1.15% per annum, is potentially taxable (but paid gross) and allows up to £1 million to be deposited
- Direct Saver – which pays 1.00% per annum, is also potentially taxable (but paid gross) and allows up to £2 million to be deposited
So, where appropriate, a couple can hold in excess of £6m with NS&I, earning in excess of 1.00% interest and as NS&I is backed 100% by Her Majesty’s Treasury, so offers greater security than the institutions detailed above.
As to whether that level of cash is a good idea, well that depends on the individual’s goals, and other financial circumstances, and modelling how these cash-like assets move with time, and how they may, or may not meet long-term financial objectives is integral to how we build financial plans. Wingate operates on a fee basis, and is independent, therefore we will recommend any appropriate solution for our clients, and not from a limited range of funds or investments.
