Is cash still king?

Despite the impacts of the Global Pandemic over the last 10 months, recent Bank of England statistics show that vast amounts of cash are sitting in bank accounts and National Savings in the United Kingdom and we are saving more than ever.

In its recently published Monthly & Credit Summary, the Bank of England confirmed household deposits in October 2020, increased by £17.6 billion despite big outflows from National Savings. In fact, in those 10 months of 2020, more than £150 billion was put away into savings accounts. It also notes that interest rates remained at historically low levels.

As the realities of the Financial Crisis set in, during the last few months of 2008, the official Bank Rate of Interest fell from 5% to the ‘emergency rate’ of 0.5% in March 2009. To all intents and purposes, it has remained that low ever since, peaking in April 2018 at 0.75%. As we began the first lockdown in March 2020, the Bank Rate was reduced further to 0.1%.

The actions taken with interest rates 12 years ago were done to support an ailing economy and support spending and jobs. Given what we are enduring with COVID-19, it is fair to say interest rates are going to stay low for some time as we face similar circumstances.

What does this mean for people holding cash?

Many people hold their cash in standard deposit accounts with their bank. Reviewing the ‘Big Four’ Banks on 5th January 2021, the main rate for all is 0.01%. That means holding £1,000 in one of these accounts will pay you 10p (Ten Pence) in interest in a year and wrapping the monies into a Cash ISA does not always gain much more. Indeed, the graph below shows that since the beginning of this Millennium, the UK has accumulated to £200 billion in bank deposits earning zero interest!

We are aware banks and building societies offer many savings products that, in turn, offer better returns on cash. However, many come with terms and conditions. For example, you may have to keep the funds in the account for a specific amount of time or you have to make a savings commitment (e.g. a regular monthly amount). If you were to breach one of these commitments or do nothing when a rate expires, you will generally find you default back to the standard savings rate mentioned above.

What can Prosperis do to help?

We alluded at the start to big outflows from National Savings & Investments at the end of last year. This was in response to a well publicised reduction in interest rates and proves that people are conscious and prepared to take action. Many comparison sites exist and indeed you can significantly improve on the standard deposit rates, as long as you are prepared to do the research. However, an overwhelming number of us take no action as evidenced earlier.

Holding cash is a vital part of any financial plan. Being financially able to deal with the unexpected at short notice is important as well as preserving your capital in anticipation of a large purchase or savings goal. It is important your money works as hard for you as you did to build it up and, at the same time, its real value should be preserved over the longer term as inflation is ever present. Other areas of importance are financial security, speed of access should you need the funds and tax efficiency so that you can maximise what you are getting.

The Prosperis Investment Process includes cash and starts with you! We have developed interactive solutions to allow us to continue to advise clients new and old as we continue to embrace remote working – though one day soon we would love to see you face-to-face.

Through our secure web-based platform, sharing your current financial snapshot, goals, objectives and concerns we can work with you to develop a strategy and make recommendations. Our investment beliefs underpin our proposition and solutions to our clients and we would be delighted to share these with you.

For more information please contact us. Our number is 01423 223640 and we can be reached via email at advice@prosperis.co.uk.

Sources: https://www.bankofengland.co.uk/statistics/money-and-credit/2020/november-2020 ‘Big Four Banks’ are Barclays Bank plc, National Westminster Bank plc, HSBC plc, Lloyds plc – savings rates published and available on 5th January 2021.