At times of low interest and high inflation, a cash savings account can be a bit like a leaky bucket. But if you don’t like your money losing value over time, what else can you do with it? Daniel Ardern, Chartered Financial Planner at Gresham Wealth Management, talks you through the most practical alternatives.
We all like to have a bit of money tucked away in case of emergency. Expecting the unexpected is a sensible approach to take – having a rainy day fund to pay for urgent repairs to your home or car, a safety net if you’re ever between jobs, or simply a pot to dip into when you want an extra special holiday or a major unplanned purchase. If you’re able to save more than you spend and build up such funds, that’s excellent… but then you face the other tricky question of where you should keep it.
You’ll have noticed that interest rates on cash have been pitifully low for many years now – few today would even believe that back in 1990 a saver could watch their cash snowballing at rates of around 13 per cent. Today most savings limp along at around 1 per cent a year, and with inflation recently overtaking interest rates as a result of the weakening of the pound post Brexit, your savings lose purchasing power every day.
So are there any better places to put your cash than in a savings account?
How much cash do you need?
If your income exceeds expenditure, then over time you can accumulate quite a surplus of cash. When we at Gresham Wealth conduct initial reviews with new clients, we sometimes find that they have cash reserves well above even a generous emergency fund! However, in most cases these funds aren’t working as hard as they could.
If you are keeping more in cash than you’re likely to need at short notice, you should consider other options. Here are six ways in which you can better use surplus cash reserves.
1. Find a better cash account
Many people find themselves with significant cash reserves in their current account. Most banks provide little or no interest on current accounts. Therefore, if you wish to retain high cash balances, depositing to a savings account can significantly improve returns.
If you do not require immediate access to a proportion of your cash deposits, it is worth considering term deposits. Term deposits offer a fixed rate of interest on deposits that are held for a pre-specified period that is often greater than that available on an instant access savings account.
Further, National Savings & Investments (who are a State owned organisation) offer a number of cash products which may better suit your needs & requirements and improve your overall experience of holding cash. Details of the products offered by National Savings & Investments can be found here.
You should be aware that cash deposits held by an individual with a single UK firm are covered by the Financial Services Compensation Scheme (FSCS) up to £85,000 should the firm fail. This does not apply to deposits held with National Savings & Investments which are guaranteed in full by HM Treasury. Details of the protection provided by the FSCS can be found here.
2. Explore your ISA options
Although lots of people like the straightforward nature of cash ISAs, there are additional options to consider.
If you are under 40, you might want to consider opening a Lifetime ISA (if you have one already, you can continue paying into it until the age of 50). This gives you a 25 per cent bonus on savings of up to £4,000 a year. You should be aware however that the bonus is only retained if the Lifetime ISA deposits are drawn to either buy your first home or after the age of 60 (there is a penalty for withdrawals at other times).
If you’d like to put some money aside for younger relatives, Junior ISAs (JISAs) can be good savings vehicles as they don’t eat into your own ISA limit (remember that any contributions made into an ISA held in your name count towards your annual £20,000 ISA limit). Compare cash and stocks & shares JISAs here.
Investing in the stock market comes both with risks and reward. The markets have delivered strong returns over the past 6 years, and although it can be a bumpy ride, the long-term returns of stock market investments can be significant.
If you’re likely to need access to your money in the shorter term (within the next 5 years), the stock market is unlikely to be suitable. Much depends on your personal risk profile, which a financial planner can help you work out.
You can also use Stocks & Shares ISAs to shelter your investments from Capital Gains Tax & Income Tax. Be aware however that investments made within a Stocks & Shares ISA will use a proportion of your £20,000 ISA allowance (2017/18 tax year).
4. Top up pensions
If you’re unlikely to need access to your money before age 55, you may wish to consider making additional personal pension contributions. There are a number of ways by which tax relief is applied on pension contributions. Most commonly, basic rate tax at 20 per cent is automatically claimed from HMRC by your personal pension provider and added to your pot. If you’re a higher or additional rate taxpayer, you can claim further tax relief from HMRC.
When you come to draw an income from a personal pension, based on the current rules you will be entitled to draw 25% of the value of your pension as a tax free lump sum. The remaining 75% will be taxed as income.
5. Business cash
Cash doesn’t only mean money sat in your personal account. If you are a business owner, large amounts of cash in your company account could be put to better use. For example, making either regular or lump sum payments into a pension rather than drawing cash as dividends can deliver many positive outcomes. Not only can you save income tax, but you are also moving money into an environment free from inheritance tax.
6. Spend it!
Yes, you heard right! Having a ‘saving’ mindset is commendable, but not if it’s to the detriment of you enjoying your life while you can.
Whenever you are saving – or investing – it’s always worth asking yourself the question: ‘What am I actually doing this for?’ The answer will help you to make the most appropriate decision.
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