“Cash is like oxygen – you want to be sure it’s around, but you don’t need to have excessive amounts of it around” – Warren Buffet. So what is the cost of cash and how much cash should we hold?
- A couple holding cash ISAs may be missing out on £15,368 of real return over 10 years,
- Inflation and opportunity cost are factors that impact real returns, and
- With inflation looking like being at its highest for years, the erosion of value is increased.
We are approaching ‘ISA season’ when financial advisers typically draw their clients’ attention (rightly) to the benefits of sheltering their hard earned in an ISA. In a nutshell, you won’t pay any tax on the interest or growth you get from the money you have in an ISA, which is so attractive that there are limits to how much you can put in annually.
However, it’s also worth considering what the money in your ISA is actually in – is it in cash, or is it invested in stocks and shares?
What do we mean by ‘cash’?
‘Cash’ means different things to different people. Some think of cash as physical money – the folding (and rattling) stuff. Many think of cash as including what is in their current account. Others include any money in immediate or short term access deposit accounts, or cash ISAs.
One useful way of defining cash is any money you have which is both:
(a) Immediately available to you, and
(b) Is not invested, so it doesn’t have any investment risk attached to it i.e. if stock markets go down it won’t affect the value.
What are the benefits of cash?
Cash is immediately available, so it’s great for handling unexpected events. Those might be negative – your boiler gives up, or your children need a sudden bailout. They could be positive opportunities – you suddenly find the car you’ve always wanted, or you get an unexpected chance to take your dream holiday.
Even people with substantial investments are usually advised to keep an amount of cash. Why? Simply because if you need cash short term – either for an unexpected event, or for general living expenses, you don’t want to be having to sell any investments at a time when the markets might be down or borrow at potentially high rates of interest. That would ‘lock in’ the losses.
How much cash to hold?
The amount is often based upon how much people ‘feel’ safe having. A more considered way to establish the appropriate amount is to think firstly in terms of time rather than actual amount. Ask yourself – ‘if anything bad happened, such as I was made redundant, how long do I want to know that we could manage at our existing rate of expenditure before our savings are exhausted?’
What are the downsides of cash?
How is it that you can have too much cash? Think about the cost of cash because cash isn’t earning anything whilst it’s, well…cash. In fact, it’s losing money, and in two major ways.
Firstly, you are losing through inflation. Secondly you are losing through the opportunity cost. In other words, what you could have gained through a higher rate of investment return, compounded.
With inflation and interest rates currently at high levels, and so front and centre in many people’s experience, it’s important to remember that investing is a longer term activity. Therefore, when making comparisons between investing, saving and holding cash, it’s important to use longer term assumptions for the respective rates.
Note: Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers. Tax treatment varies according to individual circumstances and is subject to change. Stocks and Shares ISAs invest in Corporate bonds; stocks and shares and other assets that fluctuate in value.The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a guide to future performance.
But the losses from the opportunity cost are even worse. For example, a couple who invests these ISAs in cash rather than in a stocks and shares ISA with a typical balanced multi asset fund could lose out on an extra £15,368 in real terms i.e. accounting for inflation. Here’s how:
If you hold your cash in an instant access savings account you may get, say 2.25% p.a2 over this longer time period based upon interest rate projections. This means that you have still lost money, because the interest is less than inflation. So, after 10 years your £40,000 is now still worth less at £39,011. You’ve still lost buying power.
If you don’t need this £40,000 for 10 years, you may decide to invest it in a typical balanced fund, let’s say one with an average per annum gain of 4.0% (after fund charges). Now of course you can still get your money at any time by selling the fund – but you might not want too, because at any time the markets could be down and you could lose money if you decide to sell at that particular moment. So, let’s assume you won’t be touching the money for 10 years. Assume also that you pay no tax on the gain – either because it’s within your Capital Gains Tax allowance or is protected in an ISA.
In this case, you will have more than offset inflation, and will have £46,421 in the value of today’s money – a gain of real buying power of £6,421 after inflation. In actual terms you will have £59,210, which is the £40,000 compounded at 4% per annum over 10 years.
So, you will have avoided losing the difference between the invested amount and the savings amount – £7,410.. You will have avoided losing even more if your alternative to investing had been to hold onto the cash in, say, a cash ISA or a current account that paid no interest – a loss of £15,368 avoided.
Of course, you’ll have your own numbers. But the principles still hold, think about the cost of cash and ask yourself some key questions – “How much have I got?” “How much do I need?” And crucially to help avoid such losses – “When do I need it?”
- Monetary Policy Report – February 2023 | Bank of England Chart 1.4
- Bank of England Monetary Policy Report February 2023 Table 1.A
Approver Quilter Wealth Limited, Quilter Financial Limited, Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 03 March 2023.
With the largest ever intergenerational passing of wealth projected over the next few decades, the need for inheritance advice has never
been greater. Intergenerational financial planning planning can also help with more immediate financial needs, particularly when generations work together to find solutions that support the whole family both now and in the future.
Currently, financial pressures are proving to be a major challenge across the generations. The cost-of-living squeeze, though, is not only impacting people’s current spending power but also their future decision-making in key areas such as housing, private education or university.
A balancing act
Many families are now adopting integrated strategies, especially in relation to gifting money, to address imminent financial challenges. The aim of reducing future Inheritance Tax (IHT) liabilities inevitably remains at the heart of intergenerational planning decisions, coupled with the growing necessity to balance both today’s and tomorrow’s shifting to support children and grandchildren now.
Getting the generations involved
Intergenerational planning tends to be most effective when plans are not just focused on those who currently hold wealth. While funding
a comfortable retirement and quality of care for the ‘caretaker’ generations remain fundamental elements of intergenerational financial planning; support for younger generations and ensuring wealth passes efficiently to the right individuals at the right time have become increasingly important.
Sharing a financial adviser within families has become increasingly commonplace; offering significant benefits, particularly when it comes to
joining up a whole family’s needs with inheritance and gifting strategies, while treating all family members fairly.
If your family needs help with any aspect of intergenerational planning, we’ll be happy to assist by encouraging more open financial conversations across the generations. Providing your family with lasting benefits means taking action now, so please get some clear and trusted inheritance tax planning advice.
Source: Quilter Essentially Wealth Q4
The Chancellor, Jeremy Hunt, was faced with a challenging economic backdrop to his first major set piece, grappling with a combination of over 11% inflation, an official recession and the need to calm markets and re-establish the UK’s financial credibility following the turmoil of September’s ‘mini-Budget’.
Mr Hunt’s position was not an enviable one. His long-term focus, he stated, is on stability, growth and public services. Most of the attention, however, centres on the balance he attempted to strike between tax increases (real and stealth) and spending cuts to fill the over £50 billion hole he has inherited. Our budget summary will take you through the Autumn 2022 statment; the key announcements covered a wide range of ground:
- The main income tax allowances and thresholds, the main national insurance thresholds and the IHT nil rate bands will remain frozen at their current levels for an extra two years until April 2028.
- The threshold for the 45% additional rate of income tax will reduce from £150,000 to £125,140 from April 2023.
- The dividend allowance will be halved from April 2023 and again the following year.
- The capital gains annual exempt amount will be cut from £12,300 to £6,000 for 2023/24 and halved to £3,000 from April 2024.
- From April 2023 the energy price guarantee will be adjusted upwards, costing typical households an additional £500 from the current position.
- State pensions will increase under the ‘triple lock’ in line with the 10.1% September CPI inflation figure, alongside universal credit and certain other benefits.
- Business rates will be updated with additional targeted support over the next five years.
- Electric cars will come into the tax orbit for road tax from April 2025
Read our budget summary – Autumn statement 2022
With a full Budget still likely in the Spring, there is much to inform your tax and financial planning for the remainder of the current tax year. If you have any questions about how the Autumn Statement affects you, please get in touch.
Analysis3 has revealed that stopping or reducing pension contributions, even for a relatively short time such as a year, can have a significant impact on your final pension pot, with savers potentially being thousands of pounds less well off in retirement. In short, pausing pensions could be costly.
Choosing how to cut back
Almost all (93%) of those who responded to the analysts’ survey said they are feeling the impact of increasing costs and inflation. A further 77% expect to have to make cutbacks on saving or spending. However, an encouragingly low figure of 6% said they planned to reduce their pension contributions.
Thinking of the long term
Whilst it might seem tempting to give up or pause your pension contributions, it’s important to consider the impact any breaks in contributions would have on your retirement pot.
Keeping your long-term plans in mind and maintaining your savings habit wherever possible will help to keep your retirement planning on track. Talk to us before making any major decisions as pausing pensions could be costly.
According to a recent survey by the Pensions and Lifetime Savings Association (PLSA 2021)*
- 51% of people focus on their current needs and wants at the expense of providing for the future;
- Only 23% of people are confident they know how much they need to save to be comfortable in retirement.
We can help you build up the funds you’ll need to enjoy your retirement years to the full. We can give retirement income & pension planning advice on personal pensions, getting the most suitable annuity rates, stakeholder pensions, self invested personal pensions (SIPPs), small self-administered schemes and equity release.
3 Standard Life, 2022
With inflation expected to remain above the Bank of England’s (BoE’s) target deep into 2023, interest rates are forecast to rise further still. What can mortgage holders expect with their mortgages in times of rising rates?
Up and down
The effect rising rates have on you depends on your mortgage type. Those with a tracker mortgage will have already seen their rate increase directly in relation to Bank Rate, meaning costlier repayments as soon as the BoE makes a change. Standard variable rates (SVRs) also rise (or fall) in response to the BoE’s decisions. But SVRs can change at any time because they are set by the lender rather than simply tracking Bank Rate.
Shielded – for now
Fixed rate mortgages, on the other hand, are protected – for now. If you are on a fixed rate, that means you won’t see any changes in your mortgage until your current deal ends. At the end of your fixed-rate deal, you will automatically be switched to your lender’s SVR or a reversionary rate, which could prove expensive. So, it’s a good idea to consider your options well before the end of your fixed term.
Should I remortgage now?
If you’re in the last six months of your current mortgage deal, it might be worth locking into a fixed rate mortgage now. By locking into a mortgage deal before your current one expires you can avoid rolling onto your lender’s default rate. You will then know what to expect with mortgages in times of rising rates and plan your finances. However there may be a penalty for leaving your current deal early.
We can help find the most suitable option for your unique circumstances.
We don’t just deal with the ‘high street’ lenders – we offer a home and buy to let mortgages review service that is representative of the whole of the market. We can source funding from smaller, niche lenders and the newer challenger banks. We can help with equity release loans and find more competitive refinance re-mortgage rates.
Take a look at our Guide to Mortgages and Protection to get a feel for our service and how it will make your life, your mortgage loan and your move, easier for you.
You have a life worth looking after. Life insurance provides valuable peace of mind that your family or other dependants would be financially protected if you were no longer around to provide for them.
There are an estimated 3 million people in the UK living with cancer, rising to a predicted 3.5 million by 2025; 7.6 million people are living with heart and circulatory diseases and stroke strikes every five minutes*. Few things in life can provide more peace of mind than having a secure financial future.
As a minimum, it’s important to ensure you have enough cover to pay off your mortgage, as this is likely to be your household’s largest single outgoing. It’s also worth reviewing how much other debt you have, such as personal loans and credit cards. Consider too whether you want
additional protection to cover childcare costs, education expenses or household bills.
Consider critical illness cover
It can be worth adding critical illness cover for an extra premium. This would pay out a lump sum if you are diagnosed with an illness or condition listed on the policy.
Protect your income
Income protection can replace a percentage of your salary if you can’t work due to an accident or illness, helping you to keep up with financial commitments until you recover.
Time to face up
A typical non-smoking couple in their 50s have a 28% risk of being unable to work for two months or more before they retire; a 13% risk of suffering a critical illness; 5% risk of death; 35% likelihood of any of these events happening**. In this unpredictable life, accident or illness can strike at any time – whatever your age – so it’s worth thinking about how you or your loved ones would cope should the worst happen.
You have a life worth looking after. Life insurance provides crucial peace of mind that those we leave behind won’t suffer financially, while Income Protection and Critical Illness Cover are a vital defence against loss of income and serious illness
*Macmillan Cancer Support/British Heart Foundation; ** Risk Reality Calculator, LV;
Whether it’s young couples moving into a first home together or older pairs blending families after a divorce or bereavement, many people
co-habit at various stages in their lives. But some who have lived together for years, or even decades, might be surprised to learn
they don’t have the same legal rights as a married couple or civil partners. There are many financial decisions for co-habiting couples …
Take property for example. If your name does not appear on the deeds, you are not automatically entitled to any share of the property, regardless of how long you have lived in it or how much you have contributed to a mortgage.
That’s why it’s important to think about tenancy types when buying a property with someone else. You can choose to be joint tenants, where the property is owned equally, or tenants in common, where each person owns a specific part of the property. As a joint tenant, you are entitled to half of sale proceeds if you decide to sell the house. Crucially, your partner would also automatically inherit your share of the home if you were to die – and vice versa. As a tenant in common, you only own your proportion of the property and therefore the deceased
tenant’s part would not be passed on to you unless, for example, they had bequeathed it to you in a Will.
Another consideration is life insurance. Unlike married couples who receive a bereavement support payment if their spouse dies before State Pension age, those co-habiting are not eligible for financial assistance. Therefore, if your partner might struggle financially were you to die, life insurance could help provide for their needs and thus bring peace of mind once in place.
Steps to take
If you haven’t already, you should also think about drawing up a Will. Another important document to consider is a living together agreement, which can be used to set out how your possessions or assets might be split if your relationship were to end.
Talk to us
We can help you understand the law around co-habitation so that you can protect yourself, your children, and your partner so you make the right financial decisions for co-habiting couples.
Source: Essentially Mortgages Q1 2022