Source: Refinitiv, MSCI World Index, FTSE Government Bond Index and US Treasury Bills, total returns from 31.12.98 to 31.12.23. *US Treasury bills have been used as a proxy for cash.
With the outlook seemingly positive for the immediate future, what options do cash savers have?
Even though investing your money in the long run gives it a better chance to grow and outpace inflation, cash definitely has a role to play in your portfolio. It’s there to use for emergencies. It’s also good to have some spare to take advantage of any investment opportunities. And it good to use as a buffer, so that you’re not forced to sell investments and lock in losses.
The good news for savers right now is that high interest rates provide them with plenty of opportunity to get a reasonable rate of return for a comparatively low risk. Here are some options to think about.
Putting money in a bank – For now, at least, it’s still possible to get competitive saving account rates. At time of writing the Post Office’s easy-access savings account offers 5.06%, while you can get 5.2% with Secure Trust Bank if you’re prepared to lock it away for six months.2 The advantage of depositing money in the bank is that these rates are guaranteed, although they tend to come with conditions.
Premium Bonds – Premium Bonds don’t earn interest. Instead, there’s an annual prize fund rate that funds a monthly prize draw for tax-free prizes. The rate is variable so it can change up or down, such as when the Bank of England base rate changes or when rates in the general savings market change. The odds of winning are 21,000 to 1 for every £1 Bond in the monthly prize draw. The annual prize fund rate is currently 4.40% (variable) and you don’t pay any tax on the prizes. The minimum to pay into it is £25 and the maximum is £50,000.3
Cash / money market funds – If you invest in a cash fund in an ISA your gains and income are tax-free, while a SIPP comes with significant tax benefits. Thanks to high interest rates, cash funds have proved popular with both ISA and SIPP investors on our platform both last year and this. As I write, the most popular cash fund has been the Fidelity Cash Fund and this has a distribution yield of 4.97%.
If you’d like to know about all the cash-like funds we hold on our platform, I’ve listed them out below.
Fidelity offers interest on cash – some customers are surprised to learn that we’ve been paying interest since 1 July 2022. Our first payment covered July 2022 to June 2023 in one annual payment. Now, interest is paid the month after it has been earned – so, for example, interest relating to March will be paid in April. Here’s what we offer currently. You can learn more about how we manage your cash here.
| Account | Gross rate of annual interest | Annual Equivalent Rate (AER) |
|---|---|---|
| ISA (including Junior ISA) | 3.45% | 3.51% |
| Investment Account | 3.45% | 3.51% |
| Cash Management Account | 3.45% | 3.51% |
| SIPP (including Junior SIPP) | 3.65% | 3.71% |
Please note interest rates can be changed at any time. The rates above have been applied since 1 January 2024.
Make use of tax-free allowance now…. Invest later.
There’s still time to make use of your 2023/2024 tax allowances if you’re quick. If you find that you have got a little spare cash, don’t let indecision stop you taking advantage of your tax-free allowances. As long as you move money into your ISA or SIPP before the Friday 5 April deadline at midnight, it counts. Even better, it’s earning interest while it’s in your account. You can always decide where to invest it at your leisure (although the sooner you invest it, the longer you’re giving your money the opportunity to grow – of course it could fall in value too). Learn more principles for good investing here.
Looking for investing ideas?
If you’re looking for inspiration, here are a few options to mull over.
Source:
1 Fidelity International, 28.3.24
2 MoneySavingExpert, 2.4.24
3 NS&I, 3.4.24
