Cash

The Basics

In a nutshell

  • In 2020 the interest rate was cut to 0.1% during the Covid-19 crisis

  • Inflation is higher so your cash savings are actually going backwards in terms of purchasing power

  • Savings accounts often have better rates than cash ISAs

  • Basic-rate taxpayers now get £1,000 of tax-free interest allowance every year, whilst higher-rate taxpayers get £500

What is cash?

Cash is the safe bespectacled librarian to the more flamboyant rock star that is shares. It will keep your money safe but it won't work hard for you over the longer-term.

There's a lot to be said for boring and safe. You know what you're getting. Up to £85,000, your cash is guaranteed in most institutions by the Financial Services Compensation Scheme. But if you have at least a five-year timeframe for saving we think you need to consider the stock market.

Is It Right For Me?

57% of UK adults hold some form of cash savings account

The Numbers

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£10k investments growth over a decade

This chart looks at returns over 10 years if £10k was invested in either the FTSE 100, MSCI World Index or Cash. FTSE 100 represents a collection of the 100 largest publicly listed companies in the UK, whilst the MSCI World Index is a broad, global equity tracker, that is made up of mid/large companies from 23 developed economies around the world.

It is interesting to observe that over the last 10 years, Cash has performed slightly better than the FTSE 100, however as expected, lags significantly behind the MSCI World Index. This is a welcome reminder about the benefits of diversification (the art of NOT putting all your eggs into one basket).

For those looking to make a move into investing, it is important to note that most financial advisers will suggest you try and save between 3 and 6 months' salary in cash first, in order to cope with any unexpected emergencies that life may throw your way.

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UK Shares vs Global Shares vs Cash

This chart shows you how UK shares, global shares and cash have performed each year over the last decade.

Although many people fear the risks of the stock market, this can help put it into perspective. There will be years when you go down, however markets tend to rebound fairly quickly and over time, your money is likely to grow.

Approaching the end of Q1 21, the FTSE 100 is up circa 4.5%, erasing almost a third of its 2020 losses.

Cash is of course more predictable. But do also remember that inflation is currently higher than interest rates. Which means that money sitting in your bank is effectively less powerful with every passing day.

The Benefits

  • You know what you're getting

  • Your easy access choices give you great flexibility

  • You won't stress unduly about stock market wobbles

If you are saving for something you will need the money for in 2 years, then cash is a no-brainer. Imagine sticking a £30,000 house deposit stash in the stock market, only to have to sell up and take the money out in the middle of a market wobble.

BUT we do believe that far too many people sit in cash for the long-term and this means you are going backwards after inflation! If you're saving for more than 5 years, having everything in cash makes very little sense. The stock market is likely to do better. Time is on your side and you won't need to be a forced seller.

The Detail

SOME CURRENT DEALS

Cash is King. Or so they used to say. Of course today it’s more like some distant Baron 5,600th in line to the throne. Interest rates have remained low for a long time now, and in 2020 the interest rate was cut to 0.1% during the Covid-19 crisis. Awful times for savers. Good times for borrowers.

Let’s be clear – cash is not risky, you know what you’re getting. We should all ideally have at least 3 months’ salary in a cash emergency fund AND for shorter-term saving it makes sense. But for savers the returns are really dire and may not beat inflation, so your savings account may stay the same, but it will buy less stuff. The most generous easy-access cash savings accounts are provided by RCI Bank UK, alongside Marcus and Saga (via or in partnership with Goldman Sachs). These currently pay an interest rate of 0.4%. To put the current rates into context, Marcus by Goldman Sachs was paying a significantly higher 1.45% interest rate for the same account, as recently as November 2019.

There are other, potentially more lucrative routes to easy-access savings,with Chip paying a 1.25% bonus on savings up to £2,000 (increasing to £10,000 for a £1.50 per month fee).

Most of the interest on your cash should be free from tax. You have a personal savings allowance of £1000 (for a basic rate taxpayer, £500 for a higher rate taxpayer), meaning you can hold £100,000 in an account paying 1% without ever paying tax, even if you don’t hold it in an ISA wrapper. These days, many savings accounts will pay better rates than cash ISAs.

If you just pile up cash in your current account, there is only likely to be one winner. And that’s not you and it’s not us – it’s the bank. Do shop around for the best cash deals. As we speak, for example, Virgin Money’s current account pays 2.02% on the first £1,000 in your account and Nationwide's FlexDirect account pays 2% on upto £1,500 for the first 12 months; so you can make your cash work harder than a limp 0.0001%!

If you’re after a fixed term of a year, Ahli United Bank offer 0.65% with a minimum deposit of £1,000, whilst OakNorth Bank offer 0.58%, with minimum deposits starting from £1. 

Rates correct as at March 2021