CashNov 18 2021

Making the most of cash savings

Supported by
Flagstone
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Supported by
Flagstone
Making the most of cash savings
Pexels/Andree Taissin

Keeping money in cash has gone out of fashion in recent years, as a result of low interest rates and savings accounts offering very little.   

But at the moment many people may have cash to spare as a result of the pandemic. Unable to go on holiday or working from home has meant that some have amassed sizeable sums.

Data from the Office for National Statistics, published in September, found that UK households reduced their spending during Covid-19 by an average of £109.10 per week.  

Alex Shields, chartered financial planner at The Private Office, says: “The reduction in spending as a result of lockdown was a good opportunity for some people who have not saved before to build up some cash reserves, and in some cases these have been quite significant.”  

Whatever the amount saved, the money may be sitting in bank accounts earning very little while people ponder what to do with their unexpected windfall. So, this could present an opportunity for advisers to show clients what they could do with these savings.  

But Simon Merchant, co-founder and chief executive of cash deposit platform Flagstone, cautions: “Often, advisers may not be aware of the complete picture of their clients’ cash holdings, which can prevent them from providing timely and effective holistic advice.”  

Jason Hollands, managing director – corporate affairs at Tilney Smith & Williamson, emphasises that there are good reasons for holding cash in the first place.

“Everyone needs some cash reserves for short-term needs and emergencies, so it clearly makes sense to hold a cash buffer, even when returns are very low.” 

But balance is key, as he explains: “While amassing a vast cash war chest can provide a warm sense of financial security, it is to some extent a false one.

"Clients will be guaranteed to become worse off in real terms as the future spending power of their hard-earned wealth will be steadily eroded by the ‘silent assassin’ of inflation.”   

Scott Gallacher, director and chartered financial planner at Rowley Turton, takes a similar view: “Unfortunately, with rates where they are currently, savers need to decide whether or not the certainty of cash is sufficient enough of a benefit to offset the inflation erosion they are experiencing.

“A saver with £100,000 on deposit might earn a little over 1 per cent on a variable deal, but with inflation currently over 3 per cent, they are in effect losing 2 per cent a year in real terms.

"The impact of 3 per cent inflation on the 'real' value of £100,000 of savings earning 1 per cent is equivalent to burning more than £150 every month.” 

How to spend or save it 

When considering what to do with the cash, Hollands says: “It is important to stand back and consider the overall balance people have between savings and longer-term investment and whether this is optimal, and for them to potentially shift excess cash balances into funds, as well as pay down any debts where the servicing costs might be high. 

“With their remaining cash savings, they should of course be trying to achieve the best rates of interest possible, while being mindful that only deposits of up to £85,000 per person are protected at each UK bank under the Financial Services Compensation Scheme. 

“Where savings are reallocated into investments, the right selection within a balanced portfolio will of course depend on the goals, time horizon and risk profile of each person.

"However, when yields are so low on bonds, equities continue to be the relatively more attractive major asset class in the current environment.

"With nominal bond yields relatively unattractive, alternative assets have a role to play to help do the job of dampening volatility. These can include absolute return funds, private equity and infrastructure.”  

Ross Leckridge, associate director at Johnston Carmichael Wealth, agrees that it is a priority to have enough cash tucked away in case of the unexpected. 

“There is always the natural inclination to add more monies to investment markets. However, it is key to ensure that you have a suitable emergency fund stored away first.”

And then clients can either save or spend what they have amassed, as he explains: “They can use Isas for tax-free growth and withdrawals; Junior Isas if they have children; pensions for tax relief on contributions and which are inheritance tax friendly; and structured products, that is, investments tied to the performance of various indices.  

“Alternatively, they can use the savings to tick off some lifestyle goals on their list that they have been unable to achieve in previous years, such as holidays, buying a new car or undertaking home renovations.”  

Where the clients do not need the spare cash for themselves, Shields refers to gifting: “Gifting to the next generation could be a tax-efficient way of using the money, especially if the current owner has IHT issues.” 

Clients may also welcome the opportunity to try something different, as Patrick Christie, graduate trainee financial planner at WealthFlow, says: “For those uncomfortable with investing or for those operating on short investment timescales, premium bonds are a potentially fun and novel way to use capital. Backed by the government, capital remains safe but brings the possibility of large prizes.”

He adds: “For those looking to make a difference to the world with their money, the new NS&I green bonds are an intriguing proposition. The interest rates are relatively poor, but for many consumers, the ethical credentials outweigh the low returns.

"Maybe we will see a rush to green bonds following COP26?”  

Fiona Nicolson is acting deputy features editor at FTAdviser