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Monday, 9 July 2012

IN PRAISE OF CASH


A lot of people ask me where they should invest £XX,000 from redundancy/mother’s estate/house sale etc?

I always reply that I never give investment advice because investments can lose you money and I never want to give advice that has cost people anything. I know invested money can go up but it can also go down. And by the time those selling you the investment have taken initial charges, annual fees and hidden costs from your money, the investment has to do very well indeed to leave you any profit. Generally it doesn’t beat cash. And it certainly won’t guarantee to do so.

So I always advise people who suddenly have a few thousands or tens of thousands of pounds which they are not using – put it in cash. Unlike investments cash cannot go down. It just goes up. Which helps you sleep at night. And the same goes for tens or hundreds of pounds or even hundreds of thousands.

But you have to make sure that your money is safe and the return is worthwhile.

Safe
Up to £85,000 saved in a UK registered bank, building society, or credit union is guaranteed by the Deposit Protection Scheme run by the Financial Services Compensation Scheme (FSCS). The limit is ‘per registered institution’. So money in two banks which share a licence will only be protected up to £85,000 in total. That can be confusing. For example Derbyshire Building Society, Dunfermline Building Society, and Cheshire Building Society are all owned by Nationwide Building Society and operate under one licence. So if you have £85,000 in one of them any money in any of the others will not be protected – only the total between all four will be safe up to £85,000. www.fscs.org.uk

It gets even more confusing with the banks. Bank of Scotland, which owns Halifax and Birmingham Midshires, operates under one licence. But that is separate from the licence of its owner Lloyds Banking Group. But Cheltenham & Gloucester, also part of Lloyds, does not have its own licence so money in it counts as part of any money in Lloyds itself.

The Financial Services Authority publishes a brief guide to major banks and building societies and how they are linked www.fsa.gov.uk/consumerinformation/compensation/brands

And moneysavingexpert has a useful online tool to check other banks a brand is linked to www.moneysavingexpert.com/savings/safe-savings#whatcounts

Your money is safe up to that limit even if the bank holding it went bust. Although a bank going bust is very unlikely, I still recommend keeping below the limit. Just as I always wear a seatbelt even though I do not expect to have a collision.

Most banks operating in the UK are regulated here and covered by the FSCS. But those which have their home in another EU state can be regulated in their home country. Technically they operate here as a branch. If the bank did fail you would have to go to the compensation scheme in its home country. The amount protected is slightly less. It is €100,000 – which at the moment is worth just over £80,000.

Banks based in countries outside the EU have to be regulated and registered in the UK so the £85,000 limit applies. And some EU based banks – such as Santander and Bank of Ireland UK – are separately licensed and protected in the UK.

The amount protected is per person. So for a couple with a joint account up to £170,000 is protected in the UK and €200,000 in the rest of the EU.

If you have more money than you can easily divide into £85,000 chunks you can get it all protected by using National Savings & Investments. It is 100% backed by the UK Government up to any amount. But its rates are generally quite low. Some are tax-free and the combination of 100% protection and 0% tax can make them attractive to people with a lot of money who pay higher rates of tax. More at www.nsandi.com

Worthwhile
People often complain that their money is earning nothing in a savings account. And that can be true. First Direct for example, which is part of HSBC, pays 0.05% on its basic savings account. So on £1000 it would pay you 50p a year for the use of it – even though it would be making £10 a year or more by lending it out. No wonder people say rates are rubbish!

But it is not just the fault of the banks. If we search out the best savings deals we can earn more than 3% on instant access accounts and more than 4% if we are prepared to leave it in one place for four years.

These rates come with catches. The 3% instant access accounts all offer a ‘bonus’ for a year or so. After that the rate will fall down to something pathetic like 1% or 0.5%. So you must move your instant access money at least once a year.

One interesting alternative is offered by a bank called Investec. It has two accounts where it guarantees to pay the average of the top ten or top five accounts on the market. In exchange you must give it three or six months’ notice to withdraw cash. It is currently paying more than 3%. You need at least £25,000 to open the account.

Remember that if you commit to a savings account that is a fixed rate for a fixed period such as one year or even four, you cannot get your money out early. If you do you will pay a hefty penalty. And although 4% a year or more over four years may seem a good rate now, if interest rates start to rise it may seem poor value by 2016. So it is a gamble on future interest rates.

You can check good savings rates at www.savingschampion.co.uk. I like this site because its top buys are not influenced by deals it has done with the providers. You can also use www.moneyfacts.co.uk to find the best buys. But beware that MoneyFacts’ first offerings will not necessarily be best buys – they will be clients. To get the real top rates, click on ‘savings’ then use the search to put in your criteria and then click on ‘sort’ in the column ‘AER’ to make sure the best really are on top.

Inflation
People who want to sell you investments often say that inflation destroys cash. And that £1000 today is worth 3% less in a year's time because inflation is 3% (or whatever it is). It is true that in the long term inflation destroys wealth of any sort that you hold. But inflation applies equally to the value of investments as it does to cash. So although high inflation is undesirable for those with money, it is irrelevant to the discussion about the value of cash versus investments.

Remember too that with an investment you have to add fees and charges onto inflation before you will make a real penny. So the inflation rate for investments is always higher than it is for cash. Always.

If a financial sales person mentions inflation, ask what guarantees they will give that the value of your investments will beat inflation. And when they say things by way of a 'reply' just repeat 'yes but what is the guarantee?' Then put it in cash.

Remember too that if you have debt then inflation is your friend. And who has the biggest debt? The Government which says it wants to control it!

Tax
The interest earned on savings is taxable. All banks and building societies deduct tax at 20% from the interest automatically. If you are a basic rate taxpayer that means tax is paid and you need not worry about it. If you are a non-taxpayer you can register to have the interest paid gross and claim it back from past years back to 2008/09. HMRC says there is around £200 million waiting to be claimed http://www.hmrc.gov.uk/incometax/tax-free-interest.htm. If you are just above the tax threshold then you may be able to claim half the tax deducted back. This is very complicated to work out but there is some help here http://www.hmrc.gov.uk/taxon/bank.htm

If you are a higher rate taxpayer you must tell HM Revenue and Customs so the extra tax can be collected either through self-assessment or your tax code.

If you are part of a couple and one of you pays tax and the other doesn’t you can save tax by holding the savings in the name of the non-taxpayer. To do that the money must be transferred into the name of the non-taxpayer. If you split up then the money will belong to just that person.

If you pay tax then your first savings account should be an ISA where interest clocks up tax-free. You can put up to £5,640 into one this tax year 2012/13. Again move your money each year to keep up with the best rates. You do that by opening up a new ISA and getting the new provider to do the transfer for you. Do not just take it the money out and put it in a new ISA. If you do then it will lose its tax-free status.

Enjoy your cash!