Is cash too safe?

August 03, 2021

One of the great themes of the past 15 months has been accidental savings. That is the amount people in the UK have “saved” by not going out and spending.

“Thrifty Brits stash the cash in lockdown” has been a typical headline. It is quickly followed by an estimate of how much cash we might have “stashed” through not going to the pub, eating out, or buying new clothes. One estimate put the figure at £160bn.

The Bank of England suggests that up to 5% of this could be spent, boosting the UK recovery as lockdown eases. Economists at Deutsche Bank went further, suggesting that around 10% could be spent on nights out, holidays, cars, and more.

Would I be shocked by £20bn of extra spending? No,” said economist Sanjay Raja. Spending on this scale would comfortably add between 0.5% to 1% to UK GDP.

But however much is spent, that still leaves a huge amount of money that is not spent. A huge amount of money that remains “accidentally saved.” According to Peter Flavel, the CEO of Coutts, however, we are not saving wisely.

From the perspective of an Australian who has lived and worked in several countries and is now in the UK, Flavel makes a simple point. The UK’s Individual Savings Account (ISA) is “potentially the best medium-term savings product globally.” But, he argues, “they are not used very well, [in fact] they are used badly.”

As you may well know, a couple can invest £40,000 per year into ISAs. Junior ISAs have a limit of £9,000 per year. The products enjoy tax advantages and give immediate access to your cash if it is needed. Small wonder that Flavel describes the ISA as a “World Champion” amongst saving options.

According to recent statistics, around 20% of the UK adult population has invested in an ISA. However, what concerns Flavel is that the overwhelming majority of these ISAs (76%) are held in cash, meaning that with low interest rates and inflation, the real value of the ISA could actually fall over time.

We take a balanced approach to financial planning. Of course, it’s often a good idea to keep some money in cash. After all, none of us know when we will need access to our “emergency fund.” But Peter Flavel makes a very valid point: we mustn’t allow a disproportionate amount of our savings to accumulate in cash accidentally.

Too much cash runs the risk of unbalancing your overall financial planning portfolio. As a result, it gives you a more cautious approach than you might otherwise want or need. Also, with low interest rates likely to be the norm for some time, it risks poor returns. But, of course, where that balance lies is different from one individual to the next.

If you are interested in finding your own balance, do not hesitate to contact us. While “I’ve accidentally got too much cash” doesn’t sound like a problem, it very well could be in financial planning terms.