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Cash

The basics of cash

In a nutshell

  • In June 2022, the Bank of England rose interest rates to 1.25%.

  • UK inflation rose to 9.1% in June 2022 - a 40-year high.

  • In June 2022, the Bank of England warned that inflation is likely to exceed 11% by October.

  • Back in the spring of 2020, interest rates were reduced to a historic low of 0.10% due to the Covid-19 pandemic

  • Since then, economic recovery has driven inflation higher, meaning that cash savings are actually going backwards in terms of purchasing power

  • Savings rates are at last beginning to go up as providers adjust their interest offers accordingly, although none are matching current inflation levels

  • Basic-rate taxpayers get £1,000 of tax-free interest allowance on their cash savings 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 as hard for you over the longer-term.

There's a lot to be said for boring and safe - you know exactly what you're getting. Plus, your cash is guaranteed up to £85,000 in most institutions by the Financial Services Compensation Scheme, meaning you're protected up to that amount if everything goes pear-shaped.

In addition, most of the interest on cash should be free from tax. There's a personal savings allowance of £1,000 for a basic rate taxpayer or £500 for a higher rate taxpayer. This means you could hold £100,000 in an account paying 1% interest without ever paying any tax, even if you don’t hold it in an ISA wrapper.

However, cash isn't always the right answer, particularly if you have at least a five-year timeframe for saving - this is when you might want to consider dipping your toes into the stock market.

Is cash right for me?

57% of UK adults hold some form of cash savings account, but you should consider if they are definitely the right home for your money before opening one.

How does cash compare to other investments?

Growth of a £10,000 cash investment over a decade, compared to the FTSE 100 and MSCI World Index.

This chart looks at returns over the past decade (2012-2021) if £10,000 was invested in either the FTSE 100, MSCI World Index or Cash.

The FTSE 100 represents a collection of the 100 largest publicly-listed companies in the UK. The FTSE 100 total return is similar to the FTSE 100, however it also takes into account dividends that have been paid to investors over the period. This provides a more holistic view of UK market performance.

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's 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's 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.

Cash vs UK Shares vs Global Shares

This chart shows you how cash, UK shares, and global shares have performed each year between 2012 and 2021.

Although many people (understandably) fear the risks that come with the stock market, this chart helps to put it into perspective. There will be years when you make losses, however, markets tend to rebound fairly quickly and over time your money is statistically likely to grow.

By the end of Q4 2021, the FTSE 100 (TR) was up 15.6% for the year, counteracting the 13.1% it lost during the market crash in 2020.”

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

The benefits of cash

  • You know what you're getting

  • Easy access accounts give you great flexibility

  • You won't stress unduly about stock market wobbles

If you're saving for something you will need to withdraw the money for within 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!

The disadvantages of cash

  • Have to pay tax if the interest on your cash savings exceeds either £1,000 (basic rate) or £500 (higher rate)

  • Stocks and shares have outperformed cash 9 out of 10 times in a 10-year period

  • Inflation can eat away at the purchasing power of your cash savings

Despite the benefits of cash, there are still far too many people that sit in cash for the long-term, which means their savings are effectively going backwards after inflation! If you're saving for more than 5 years, having everything in cash makes very little sense - in fact, the stock market is likely to do better.

Summarising cash

Cash is King. Or so they used to say. Of course, today it’s more like some distant Baron that's 5,600th in line to the throne. Interest rates have remained pretty low for a long time now, making it an awful times for savers but a good time for those that are borrowing, but rising inflation is also starting to make its mark on the purchasing power of cash.

So to reiterate, cash is less risky because you know what you’re getting. You should ideally have at least 3 months’ salary in a cash emergency fund anyway, and for shorter-term saving, it makes the most sense. However, lately returns have been poor and do not beat inflation, so even though your savings account may appear to stay the same, in practice it will actually buy you less stuff.

The top cash savings accounts

Easy access cash savings accounts

As of June 2022, Virgin Money's M Plus is the top-paying easy access cash savings account, offering 1.56% on deposits of up to £25,000 (0.75% on deposits above this) The Chase current account pays 1.5% on deposits of up to £250,000 (but you have to wait 3-5 weeks to open this account), while Zopa pays 1.4% on deposits of up to £50,000.

Fixed rate cash savings accounts

If you choose a fixed-rate account, you won't normally be allowed to take your money until the end of the fixed term. If you do keep the money in, you're guaranteed to earn the rate that was advertised.

6-month fixed rate

Shawbrook Bank currently pays 1.75% for a minimum deposit of £1,000 (maximum deposit: £2 million), while Shawbrook Bank via Flagstone offers 2% with £30 cashback for some customers (but you have to pay in at least £10,000 (maximum deposit: £2 million). Remember that these interest rates are based on the Annual Equivalent Rate (AER), so you won't actually earn these rates within six months.

One year fixed rate

The top-paying one-year fixed rate accounts are Tandem (maximum deposit: £2.5 million) and Atom Bank (maximum deposit: £100,000), both of which pay 2.6%. Allica Bank also offers 2.6%, but you have to may in at least £10,000 (maximum deposit: £250,000).

Two-year fixed rate

Two-year fixed rate SmartSave offers 2.97% (minimum deposit: £10,000, max: £85,000), Allica Bank offers 2.96% (minimum £10,000, maximum 250,000), while DF Capital offers 2.95% with a lower minimum deposit of £1,000 (max: £250,000).

Three-year fixed rate

PCF Bank pays 3% with a minimum deposit of £1,000 (max: £85,000), while Buckinghamshire BS also pays 3% for a minimum deposit of £1,000 (max £500,000) but matures on May 31st, 2025). SmartSave offers 2.98% on deposits of £10,000 to £85,000.

Rates correct as at 24/06/2022.