- Around £250 billion in cash sits in accounts that pay no interest
- Government and regulators continue to pile pressure on banks to pass higher rates to their customers
- 63% of adults with £10,000 to £20,000 of investible assets hold them all in cash, according to the latest FCA Financial Lives survey
- Even many much wealthier individuals are hoarding cash
- Five steps savers can take to make the most out of their cash savings
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“It’s boom time for cash savers. The best easy access accounts are now paying interest of 5.1% according to Moneyfacts. If you had forecast that two years ago, you probably would have been laughed out of town. Some savers will see a possible peak in interest rates and treat that as a trigger to lock-in an attractive rate. But sadly, not all savers have benefited from ballooning interest rates. Around £250 billion sits in accounts paying no interest. Meanwhile MPs and the FCA are leaning heavily on banks to do more to pass higher interest rates onto their customers, as many are languishing in uncompetitive accounts.
“This comes as the FCA’s latest Financial Lives survey data shows that a whopping 63% of adults with £10,000 to £20,000 of investible assets hold them all in cash. Wealthier individuals also seem to be susceptible to cash hoarding – 37% of those with investible assets of between £50,000 to £100,000 hold them all in cash. That figure still sits at 18% for those with £100,000 to £250,000 of investible assets, and a further 22% of this group have more than three quarters of their assets held in cash. If this cash isn’t in an account with a decent rate or wrapped in a tax shelter, savers could be missing out on significant returns.
“Research from the Treasury Select Committee recently unveiled a range of everyday savings accounts from high street banks and building societies which are paying significantly less than the Bank of England base rate. It’s probably going to take some time for political and regulatory pressure to yield rewards for high street bank customers, and even then, gains may be disappointingly modest. However, there are five concrete steps savers can take to improve their own lot.”
- Only keep day to day money in your current account
“Almost everybody has a current account. It’s a necessity for happy transactions like getting paid, as well as less welcome dealings such as paying energy bills. But the interest rates on these accounts tend to be really low. It’s therefore a good idea to only keep cash in these accounts to cover your expenditure, plus a bit of a buffer, while moving the rest to higher paying savings accounts to maximise your returns.”
- Shop around for the best rates and don’t trust the high street
“Make sure you shop around for the best rates on savings too, rather than simply getting drawn in by a savings account from your existing high street provider. It might look attractive compared to your current account, but it may well be short-changing you in the context of what else is available on the market. You could also consider a savings platform to help you find good rates easily.”
- Consider fixing to lock into higher rates
“It’s also worth considering fixed rate accounts for some of your money. These lock your money away for a set time period, so you need to be willing to give up access to your cash. This wouldn’t sound too appealing except at the moment you will generally get a higher rate as a result of locking your money up for longer. Importantly, you can mix and match fixed rate accounts of different terms with easy access savings to optimise returns while also maintaining some emergency cash and hedging your bets a bit on interest rate movements. There are even cash hubs out there now which allow you to do all of this in one account and with one log in, rather than schlepping from pillar to post with bank transfers.”
- Ensure tax efficiency
“Savers also need to be more on their toes around tax than they have been for some time. A recent Freedom of Information request lodged with HMRC by AJ Bell revealed that 2.7 million Brits are set to pay tax on cash interest this year, up 1 million in a single year. This figure includes almost 1.4 million basic rate taxpayers, a number which has quadrupled in the last four years. This drastic rise in the tax haul is being driven by higher interest rates, in conjunction with the personal savings allowance which permits savers to receive a certain amount of interest each year tax-free. That allowance is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and £0 for top rate taxpayers.
“For many years savers have shunned Cash ISAs because interest payments have been so miniscule that tax was only ever a big issue for those with huge stashes of cash. But now that dynamic has shifted considerably. You do tend to get slightly lower rates on cash ISAs than savings accounts, for instance the current best easy access ISA account is paying 4.9%, compared to 5.1% from an unwrapped easy access account, again according to Moneyfacts. However, if you’re paying 20%, 40% or 45% tax on that 5%, the Cash ISA comes out ahead.”
- Invest surplus cash
“Savers should think about whether they have too much cash and might consider investing in the stock market for the longer term, in search of higher returns that can be protected by using a tax wrapper such as an ISA or SIPP. The rough rule of thumb is that you should keep three to six months expenditure in cash to tide you over in the event of a financial emergency. The data from the Financial Lives survey suggests many people are holding more cash than a financial planner would typically advise, and could afford to branch out a bit more into the stock market. Though that’s a difficult message to entertain when cash rates have come so far in such a short space of time.”
