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It’s good news that UK inflation has eased to 10.7 per cent, according to data published this week. But the drop will barely register with those affected by rising prices and by far-below-inflation interest rates.
A particular problem faces people needing to hold large amounts of cash for the next year, or even a few years — as they work out how to manage their money.
The cash might come from the sale of a property or business. It might be from a divorce settlement or inheritance, or a year-end bonus. You might have saved the money for a house deposit, school fees, healthcare or a wedding.
I’ll assume you’ve done all the sensible stuff such as paying off high-interest debt and your mortgage and maxing out your Isa and pension.
So now you want the best options to stash cash for, say, between six months and four years. It’s too short a time for many savers to consider stock market investment, as advisers generally recommend a long-term view. Usually five years plus.
So how best to keep your money in cash? First, remember to spread any very large lump sum between institutions, within Financial Services Compensation Scheme (FSCS) protection limits. If you hold money with a UK-authorised bank or building society that fails, the FSCS will compensate you up to £85,000 per person, per institution, and up to £170,000 for joint accounts.
The only bank where these limits don’t apply is the government-backed NS&I. The trade-off is that none of NS&I’s savings rates are market leading.
You may be drawn to NS&I’s premium bonds, where there’s an extra £80mn in tax-free prizes up for grabs from the January prize draw. Be under no illusions that you’ll win, even with the new prize fund being the equivalent of an interest rate of 3 per cent or so.
I hold my emergency cash fund in premium bonds (and have been averagely lucky) but am considering holding less. It’s financially irrational to hold on for a big prize even if it’s fun checking to see if I’ve won.
Instead, I’m looking at the best savings rates on offer. I’d start with £1,500 in Nationwide’s Flex Direct current account. This pays an annual equivalent rate (AER) of 5 per cent fixed for 12 months on balances up to £1,500. You could drip some of your lump sum into this.
Or consider another high-interest regular saver. First Direct’s Regular Saver Account offers 7 per cent AER and the total you can deposit in its 12-month lifespan is £3,600. The catch is it must be linked to an existing First Direct Account.
Current account holders at NatWest, Royal Bank of Scotland and HSBC can also access regular savings paying 5 per cent or more, also with maximum limits on how much you can deposit.
But with a substantial lump sum, the ceilings on these accounts mean you will have to look further — and at lower rates — and max out the amounts you can place in fixed-rate savings bonds of varying terms.
Say you’ll need all the money within four years, and might need some of it sooner. The first rung of your “cash ladder” is a one-year savings bond. Once this matures, if you still wish to be in cash, roll it into the highest-paying bond available. Alternatively, to maximise flexibility, put the proceeds into the top-paying easy-access account.
Over four years, a cash ladder for a lump sum of £100,000 could look like this based on today’s best rates.
You might boost the interest if you find higher easy-access rates, or recycle interest paid or the proceeds of the one, two and three-year bonds at maturity into other fixed-term bonds.
To cut your time monitoring rates, use Savings Champion’s free rate tracker. You input your accounts to find out if there are better deals.
Also, consider using a savings platform to move money swiftly between accounts. These remove the need for multiple applications but don’t offer access to the whole of market. Some charge a fee: two that don’t are Raisin and Hargreaves Lansdown Active Savings.
Or look at the options at investment brokers, through a general investment account for shares, funds and bonds in which you can put a lump sum. But what to hold that’s low risk?
A money-market fund is pretty safe. But it doesn’t offer much in the way of returns now — Royal London Short Term Money Market Fund delivered 1.2 per cent over the past year.
Another choice is gilts, which have been volatile this year, but short-term gilts can be appropriate for short-term cash management. If held to maturity, they can provide good income that beats savings interest, with return of capital.
For example, the Treasury gilt TR25, which matures on March 7 2025, has a coupon of 5 per cent and can be bought at £104, which gives it yield of 4.8 per cent. The principal of £100 will be returned at maturity.
Overall a return of 4 per cent from a cash sum looks achievable. That’s way short of the 10.7 per cent needed to maintain your purchasing power. But if inflation has peaked, you may see your real-terms losses shrink over the next months. Despite this week’s Bank of England rate increase, savings rates may fall next year, so I’d lock them in while you can.
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