Whilst cash is not usually a suitable home for money that is expected to be sitting around for the longer term, we usually recommend holding a reasonable sum in cash for planned expenditure and unforeseen eventualities.
After more than a decade of interest rates being at historically low levels with rates typically at 1% pa or less, we are finally beginning to see more tempting offers starting to come through.
Banks being banks though, you have to seek out the best rates. We are still seeing high street banks with new savings accounts on offer at 0.25% pa; less than a tenth of what you can achieve by shopping around.
With a fairly low amount of effort it is now possible to achieve a meaningful return on your cash buffer, and as always we'd be glad to help you to find a suitable account.
At the time of writing for example, the best instant access savings account is paying 2.9%, whilst locking away the money for 1 year will achieve 4.32%.
Beware the tax trap
With rates having been so low for so long, tax is something we haven't had to give much thought to for a long time, unless your cash deposits are very large and/or you are a high earner.
Basic rate taxpayers can receive £1,000 of interest per year tax-free, higher rate taxpayers can receive £500 pa, and non-taxpayers up to £18,570 pa. Whereas additional rate taxpayers will pay tax on all of their savings income.
With the increase in rates, a basic rate taxpayer with £34,500 or more in a market-leading instant access savings account will now be at the limit of their tax free savings. A higher rate taxpayer will need only half this amount before a tax liability arises.
With careful planning though, this may be avoided. To begin with, if you are not already using your annual ISA allowance of £20,000 as part of your investment strategy, this can be a good way of sheltering your savings income from tax; any interest received on cash ISAs are tax free.
Shifting savings between spouses might enable you to take advantage of lower tax rates and otherwise unused allowances of a lower-earning spouse.
Premium Bonds can be helpful too, since any "interest" is actually classed as winnings and therefore is tax free, although care needs to be taken as the lower the account balance, the less likely you are to achieve the average prize fund rate that is quoted (currently 2.2% pa, increasing to 3% pa from the January draw).
FSCS protection - make sure you're covered
It is important to check that your chosen bank or building society is covered by the Financial Services Compensation Scheme, FSCS. This will protect your savings up to £85,000 (or £170,000 for a jointly owned account) in the event the institution goes under whilst holding your money. Some banks share their banking license with other brands in the same group, so it's important to consider whether any other deposits you may have are with banks sharing a license. You can read more about FSCS protection here:
Businesses can benefit too
It's not just individuals who can take advantage of the recent rate rises. Businesses will often hold sizeable cash balances for various reasons, but typically banks will pay extremely low rates of interest, or often, nothing at all. However, shopping around can be fruitful; the highest rate of interest currently available to businesses on instant access savings is 2.2%. Whilst this may be lower than rates on personal money, it can still yield a worthwhile return.
Spend Time are here to help
As part of our regular Forward Planning we will help you review your cash balances and ensure you are achieving a reasonable rate of interest.
Between times, if you'd like us to help you find a suitable home for cash that becomes available, perhaps from a maturing fixed rate bond or an account with an initial bonus period that has ended, do get in touch and we'll be glad to advise you on the best rates on offer at the time.
Michael Roberts FPFS
Chartered Financial Planner and Director
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