"For most clients in this situation, we look to secure two to three years’ worth of income in cash with the remainder of the portfolio invested for growth, based on their individual risk profile and overall asset allocation.
"Ensuring that the income needs of the client are covered then makes it possible to increase the risk on the growth part of the portfolio and achieve potentially greater returns when markets do well.”
But holding cash can also have its disadvantages, as Scott Gallacher, director and chartered financial planner at Rowley Turton, says: "There is a downside of holding cash and that’s the opportunity cost; if you’re holding cash, it’s not invested.”
This is a point that the Financial Conduct Authority is keen to highlight, as Jason Hollands, managing director – corporate affairs at Tilney Smith & Williamson, observes: “The reality is that too many people are holding way too much cash for long periods of time. Indeed, the FCA has recently launched a campaign because it is concerned that too many people are missing out on investment returns because they hold too much cash.”
In September, the FCA announced a campaign to tackle investment harm, reporting that nearly 9m people were holding more than £10,000 of investible assets in cash.
It highlighted the problem of people missing out on investment earnings, due to the amount of cash held.
The regulator has other concerns about cash, including with regard to the risks associated with the rising volume of deposits placed with banks and building societies through deposit aggregators.
It wrote a 'Dear CEO' letter to deposit aggregators in April this year, outlining the responsibilities they would be held accountable for.
As Merchant explains: “As part of its Platform Market Study in 2019, the FCA looked closely at how clients are holding cash on platforms. It found that cash represented 8.8 per cent of direct-to-consumer assets and 3.9 per cent of advised assets under administration.
“However, when held on an advised investment platform (rather than a cash deposit platform), cash can be subject to the same annual management charge as any other asset, despite potentially earning no return for the client.
"On some advised platforms, this means cash held in a client’s self-invested personal pension can actually result in a negative rate of up to -0.40 per cent. Holding funds on a cash deposit platform instead allows the client to maximise the returns on their cash.”
Referring to the FCA’s letter, Merchant adds: “We saw this as welcome recognition that cash deposit platforms are a growing sector, and that regulators are ensuring best practice is followed.”