Tony Byrne’s View 29th May 2017

May 30, 2017 | Wealth & Tax Blog

I do come across clients from time to time who have a disproportionate amount of money invested in bank accounts, National Savings Certificates, Premium Bonds and other similar low risk/low return investments.

Whilst I understand the need to keep some money in cash for shorter term needs such as home improvements, holidays and new car purchases, I do find cases where the amount of money invested in cash is far, far too high. These very same clients happily invest money with us and enjoy significantly better investment returns than they receive from their bank deposits, yet they persist with them. Logically this doesn’t make much sense.

Recent research has thrown more light on the subject. The research showed that people who have a lot of money in cash deposits experience greater happiness than those who have little in cash savings. However, I regularly come across clients who believe that their cash savings are more easily accessible at short notice than their investments, but this isn’t always the case.

A female client of ours recently had an annual review meeting with me. Just over 50% of her money, £280K, was invested with us and £250K was in cash deposits and Premium Bonds. Her investments had grown by 14% over the previous 12 months whereas her cash savings had returned barely 1%.  I advised her that her overall return over the last year had been about 7% because of the disproportionate amount of money invested in low risk/low return savings. In other words her investment return had halved!

Furthermore a number of her cash deposits were in fixed term bonds and fixed term Cash ISAs meaning she couldn’t access her money without paying penalties for months if not years! By contrast she could access all of her investments with us immediately without notice and without penalty and it would take about 2 weeks to get her money! She admitted she was unaware of this.

In our experience an immediately accessible cash pot of typically £20K to £30K is all that the average client needs especially where that client’s income exceeds his/her expenditure. With bank deposits, Cash ISAs and Premium Bonds paying interest of barely 1% a year why leave your money wasting away in such accounts? Inflation has recently risen from 2.3% to 2.7% which means than you are losing 1.7% a year in real terms if you are earning interest of just 1% per annum! As a consequence your savings are losing value each year. That information should make you unhappier about having large sums of cash on deposit.

We have experienced many clients reducing their cash deposits and similar low risk investments in recent years and investing their money with us instead. Many of them have transferred their Cash ISAs into Stocks and Shares ISAs. This means that, a) they do not lose any of the tax free status of their ISAs and b) they improve their investment returns by getting both tax free capital growth and tax free dividends. A win:win situation if there ever was one. Some clients have gone one step further and invested in AIM ISAs which become Inheritance Tax free after 2 years! Such ISAs are totally tax free!

So why don’t you cash savers do what you know makes sense and reduce your cash savings, invest the cash with us and get your money properly working for you? You know it makes sense.