Savers Are Missing Out on a £1Bn in Lost Interest a Year by Leaving Cash Sitting in a Current Account?

For some, the pandemic has meant accumulating extra savings due to lost holidays, meals out and daily expenses that come with the freedom to be out and about. This has also meant that there is a lot of cash and lost interest around. Here’s what you need to know.

The global pandemic has affected all our lives in many, many ways. As a society, the way we quickly adapted to our new working and living conditions is still quite remarkable. Whilst some of us have found sanctuary in baking or escaping for a countryside walk, the sight of clients’ children, cats, dogs, Amazon deliveryman and more. I hope brought us all closer together through mutual circumstance.

Those who were lucky enough to continue working and earning unaffected have seen a significant financial benefit. During the first 12-months of lockdowns and the experience of a semi-closed economy, we have collectively managed to save an extra £162 billion, according to the Bank of England. Whilst some of this capital has gone to pay down debt, help children onto the property market or that long overdue home improvement, the majority of it has been accumulated by ‘accidental savers’ in Current Accounts.

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How to get the highest interest rate available for savings

Collectively, UK households now sit on £235.5billion within Current Accounts earning little or no interest. With the best rate of interest being offered within Current Accounts standing at 0.4% but most accepting less than 0.01% interest, should all us savers seek out the highest rate available this would result in £942million more interest being paid on this capital.

What is the best strategy to make the most of newfound savings?

With interest rates at all-time lows, the long-term prospect of holding cash is not very appealing. This means the ‘rate of return’ paid on your cash sitting with Banks and Building Societies is equally low and should inflation, the rate at which the price of goods and services rise over time, be greater than the interest rate paid, the spending power of our savings will gradually decrease over time.

So where does cash fit into your financial planning?

Cash is still a valuable asset and plays a key role in your financial planning, and always will be regardless of the interest rate paid on deposits. Why? Because cash is a risk-free asset which value is not affected by outside forces such as stock market movements. This makes it a perfect asset class to provide capital in an emergency. A sum of money that is instantly available, without penalty, should you incur unexpected expenditure.

What is a suitable level of emergency cash to hold onto?

This is all dependent on individual circumstances, but it is recommended to hold between three to six months essential expenditure which is instantly accessible. However, should you be retired and drawing an income from your investment or pension portfolio it is recommended to retain between one and two-years’ expenditure. This allows the investment portfolio respite should we incur a significant shock to stock market valuations due to black swan events.

However, it is important to consider the Financial Services Compensation Scheme (FSCS) which guarantees bank deposits up to £85,000 per person per banking license. Please be weary of ‘per banking license’ as several brands could fall under the same banking license like, HSBC and First Direct.

Looking beyond your emergency cash

As discussed, holding capital in Current Accounts over the long term is forecasted to deliver a small loss in real terms. It may still be best to accumulate savings in cash if your intention is to spend this money in the short term (within three years) as the asset class offers a risk-free environment. If so, it is important to shop around and achieve the higher rate of return offered. You could use the additional savings to reduce outstanding debt, especially if this has a high interest rate levied against the debt and no early repayment penalty.

Alternatively, you can look to invest these funds for the future or manage your tax liability through increasing pension contributions, but this will be subject to your individual circumstances.

Written by Douglas Sims DipPFS, Independent Financial Adviser, Integrity365.

Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.