In this article, our Director, Simon Hoult, provides some insight into cash savings now that interest rates have started to climb. He will consider:
- How far and how quick rates have moved
- What savings rates are now available
- The FSCS scheme and ‘cash platforms’
- The place for cash in an overall portfolio
Since November 2021 when the Bank of England (BOE) base rate was 0.10% there have been eleven interest rate rises with the base rate now sitting at 4.25%. While this has been bad news for borrowers, for the first time in about 14 years since early 2008, savers and retirees (see our annuity article) are now getting a much better deal.
What rates are on offer?
At least one bank is offering 7% for regular savings over a 12-month period with maximum savings of £3,600 per annum. Easy access accounts are now available with rates of 3% and fixed-term bonds have rates up to 4.5% depending on the term of the bond and the issuing bank.
The Financial Services Compensation Scheme (FSCS)
A quick reminder that the FSCS provides protection for savers up to a limit of £85,000 per saver, per banking license; this is an important distinction as many banks share licenses and these should be checked before committing the savings. The Bank of England provides a list of banks that share licenses.
What about National Savings?
The key advantage of National Savings is that all accounts are supported by the Treasury, meaning that there is no £85,000 FSCS limit to be concerned about and this means you can hold significant sums here with full government backing (assuming it does not go bust!). Rates, while not likely to be the best on the market, can be competitive with the Green Savings Bond offering 4.2% over 3 years, Growth Bonds offering 4% over 1 year and Premium Bonds (my personal favourite) now offering an annual tax-free prize rate of 3.30% and you might win the big one!
Over recent years, cash platforms have risen in popularity as they provide convenience where there is a need to hold many cash accounts. The downside to this is that the platform charges a fee, meaning that your interest rate is normally less than if you invested directly, and often some platforms provide access to non-mainstream banks that you would not otherwise consider.
Where does cash fit in a portfolio?
Cash savings alone will not provide the long-term returns needed to meet your financial planning goals so there will always be a need for an investment portfolio to generate inflation-beating returns. However, a well-balanced portfolio should always have an element of cash that provides certainty, liquidity, a home for known income needs or capital expenditure and funds for a rainy day or when markets are weak.
With rates now providing more attractive returns it is possible to be smarter with your savings.
A final word
My preference is to use National Savings for the security it provides as well as the varied nature of accounts and the ability to hold significant sums. Premium Bonds, which are tax-free on £50,000 per person and income bonds which provide instant access savings for £1 million per person at 2.85% should be seen as the benchmark. Where finding the best rate is important, shopping around will enable this, but be mindful of the FSCS limits or non-mainstream banks which may not be a secure home for your money.
Simon is a chartered financial planner with almost 25 years’ experience in the financial services sector.
He has a successful track record in advising high net worth individuals, with a particular specialism in the areas of financial and estate planning, pensions and investments.