CashSep 10 2019

Advisers back cash deposits despite rate tumble

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Advisers back cash deposits despite rate tumble

Advisers have backed the importance of cash in financial planning despite data showing top rates have tumbled in recent weeks.

The research, published yesterday by Moneyfacts (September 9), showed several rate cuts had been made to some of the top deals across various sectors since the end of August, causing a ripple effect on other saving deals and lowering the overall rates offered by the market.

Some rate-leading easy access accounts — which generally pay higher interest than current accounts while giving flexibility to withdraw money when needed — slashed their rates after Virgin Money lowered its ‘Double Take E-Saver’ (previously the top rate in the market) from 1.5 per cent to 1.43 per cent.

Within the days that followed, a domino effect saw Marcus by Goldman Sachs drop the rate offered in its online savings account from 1.49 per cent to 1.44 per cent, Cynergy Bank replaced their version of this account at 1.45 per cent (previously 1.50 per cent) and Ford Money withdrew its deal to new customers.

Fixed rate bonds also saw reductions. Bank of London and The Middle East cut its five-year fixed deal’s ‘expected profit rate’ twice in the space of a week, from 2.75 per cent to 2.5 per cent on August 28 and then down to 2.3 per cent on September 4.

The expected profit rate on BLME’s product was previously the top rate in the sector. As BLME is a Shariah compliant product, the bank offers an expected profit rate rather than an interest rate which is in line with the Shariah concept that money should not in itself create money.

Other previously top 10 fixed rate cuts included OakNorth’s 24-month fixed deal — which now offers 1.95 per cent, down from 2.04 at the end of August — and Masthaven’s two-year fixed, which was cut from 2.05 per cent to 1.98 per cent.

Similarly, United Trust’s 15-month fixed fell from 2 per cent to 1.85 per cent while Atom Bank cut the rate offered on its one-year fixed to 1.8 per cent from 2 per cent.

Rachel Springall, a finance expert at Moneyfacts, said: “Savers will be disappointed and frustrated to see the savings market weakening, especially if they were eyeing up the top rates and have subsequently missed the boat. 

“Indeed, over just the past fortnight, we have seen some of the best rates in the market slashed and some have been pulled from new customers entirely.

“It is as clear as day to see how delicate the savings market can be, which is why savers should never assume that the top rates will be around forever. As is proven from the last fortnight of cuts, savers need to be quick with their decision-making, or they could miss out.”

But despite low interest rates and a 'delicate' market, some advisers backed the fact cash savings played a vital role in financial advice.

Scott Gallacher, a financial planner at Rowley Turton, said: “Advisers naturally advocate the power of investments to ‘grow’ the real value of money, but cash deposits remain an integral part of financial planning.”

Mr Gallacher said cash deposits provided an important emergency fund to cover unforeseen expenditure as well as to cover short-term additional expenditure, which remained a valid with low interest rates on savings.

But he added a further use of cash was to act as a defensive element of the client’s overall wealth, noting that advisers would need to consider the potential long-term inflationary erosion effect of negative real interest rates on the client’s overall position.

Paul Stocks, financial services director at Dobson and Hodge, said: “Rates have been low for a number of years now but I’m at pains to explain to clients that moving away from cash for this reason alone ignores the fact the capital is secure and that this is the main reason people typically hold cash.

“Our approach to encouraging cash savings and the way we quantify the amounts required hasn’t changed [due to the low rates] and we simply suggest clients grin and bear the low rates as we are typically holding cash for capital security and risk aversion reasons.”

Dave Penny, managing director at InvestSouthwest, agreed cash or deposit-based savings were "vitally important" in financial planning to provide an emergency cash reserve.

He added: "The driver for the low rates currently on offer is the perception that the bank base rate will remain low, predicated on an assumption of some rocky economics post-Brexit.

"What it means for us as advisers is that we need to be particularly diligent in ensuring clients do have emergency and spending money in cash – and not much more.

"With the best rates running at approximately 1 per cent below inflation then real-term losses are guaranteed. Only clients who are totally averse to any risk to capital and who are prepared to accept that inflationary risk should have excess funds on deposit."

Just two weeks ago wealth manager St James's Place rolled out a cash management service, which will actively manage clients' cash deposits by seeking the best interest rates, to its 4,000 advisers 

Octopus Investment reported its cash deposits had surged 15 per cent month-on-month in February while research from James Hay, out earlier this year, showed a large number of investors were invested in cash for prolonged periods of time.

imogen.tew@ft.com

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