Cash is king, right?09 January 2020
"Cash is king" is not an unusual term for some. It may refer as an example to the importance of cash flow and this can be the same for individuals as well as businesses. It's a bit like a car with no fuel; it goes nowhere if it runs out, and the same analogy could be applied to cash.
Through our financial advice planning process, we are advocates of maintaining an emergency deposit fund; an amount of money that an individual can access quickly if the car breaks down, the roof leaks, or they just want to go on holiday. This possible list is endless, and we believe that a fund of at least three to six months' income is normally worth considering as a suitable accessible fund amount.
Where to hold your cash funds? We're well aware that interest rates are not exciting at the time of writing (November 2019); however, there are some secure options which should protect the value of your capital, even if the returns aren't earth-shattering. You also need to take into account the effects of inflation on any return that you receive from your savings because this will have an effect on the real return that you achieve over the year.
One key point to consider when comparing savings accounts is the interest rate offered, although in our opinion the best comparator is the Annual Earnings Rate, sometimes referred to as the AER.
Some examples of the ways in which you may want to shelter your cash are as follows.
Deposit Protection Limit
The deposit protection limit under the Financial Services Compensation Scheme (FSCS) was in the news some years ago, when it went back up to £85,000 to take account of the drop in the value of the pound following the Brexit vote. It's not something that's necessarily regularly advertised, but it's an important point to consider if you're holding cash on deposit. The deposit protection limit applies to the total eligible deposits for each person per authorised firm. So, for joint accounts, this means that each account holder is protected up to the deposit protection limit, i.e. two times £85,000.
Savers who have large sums in their bank account as a result of significant transactions (such as a house sale) may be protected under the FSCS up to a level of £1M for up to six months. Conditions apply and only certain temporary high balances qualify.
National Savings & Investments (NS&I)
NS&I is one of the largest savings organisations in the UK. It's backed by the government and offers 100% security on all deposits, so savings with NS&I aren't restricted by the deposit protection limit. In fact, for some NS&I products, such as Income Bonds, it is possible to invest up to £1M per person, all of which is protected.
More information on NS&I products, investment limits and current returns can be found here: https://www.nsandi.com/our-products
It's normally sensible to use the annual ISA allowance where you can (if not already used), which is currently up to £20,000 in a tax year per individual, and this can include the cash ISA option. The value of cash ISAs counts towards any deposit amount with a provider for the deposit protection limit. However, any interest / returns within the arrangement are free of tax, which help to protect the capital value against the effects of inflation over the longer term, or indeed provide some tax-free income if needed.
If you would like to consider your cash position and the options available, then please contact the Chapters Financial team who will be happy to explore this further.
No individual advice is provided during the course of this blog.
Keith Churchouse FPFS
CFP Chartered FCSI
Chartered Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.