Life is rather complicated for the consumer in the UK today. Many of the old assumptions do not seem to hold true anymore. Many people, the retired especially, keep hold of cash as it is “safe”, with little thought about what “safe” means to them.
Safety is relative; having more than £85,000 in one bank on a permanent basis would not be safe, as in the event of a bank failure, you would not necessarily get your money back. For those who think all banks are safe remember the failure of the Icelandic banks, not too many years ago, (http://en.wikipedia.org/wiki/2008–11_Icelandic_financial_crisis).
For savers who had money in the UK subsidiaries of Icelandic banks, the Financial Services Compensation Scheme, (FSCS), was a lifesaver; recent developments suggest a strengthening of the compensation regime, protecting up to £1Million, on deposit temporarily, with a reinforced, more automatic protection on balances of up to £85,000. What the compensation does not address is the low level of interest paid.
At the moment, the interest rates payable on cash are very low; a search on www.moneysavingexpert.com showed no better rate on one year fixed term cash savings than 1.9%, although a Santander account would give 3% on balances over £2,000 and under £20,000. Although inflation today is not significant, it has been in the recent past and only the bravest investor would assume that inflation will not rise to more typical levels in the future. The Bank of England target rate for inflation is 2%, so a return to target inflation will lead to a slow devaluation of cash over time.
Cash held in deposits has the advantage of familiarity and certainty in return; if the published rate is 1.9% per annum, then that is what you will get. Unfortunately, if you need your resources to provide an income, to supplement a State pension or to allow a higher living standard, the cash rates available are of little assistance.
Assets other than cash can have much higher returns, but what they gain in returns they lose in certainty. Portfolios can be designed with a return in mind, but their success or failure can only be evaluated after the event. All finance houses prepare estimates of return by asset classes and some publish them in a form that may be widely read.
As an example, J P Morgan offer their thoughts on 2015 returns on the Internet, (https://am.jpmorgan.com/gi/getdoc/1413614856458). There is a lot to read here and these are estimates, not statements of fact, but the returns for 2015 on UK Cash is projected at 2.75%, the return on UK 10 years Government stocks at 4.50% and general UK equity funds at 7.00%.
Back when I first joined financial services in 1996, I was told the 100 year average for returns were 3% for cash, 5% for gilts and 7% for equities, so those numbers do not seem to be too unusual, but within these averages are a lot of variation. Buying just one equity share holding and just one gilt issue would be foolhardy – there is a great deal of danger in single asset holdings in an uncertain world and considerable strength in diversity.
New investors need to think beyond just cash as their asset of choice. Although they may be moving out of their comfort zone, they need to consider their desired return, the level of acceptable risk, diversity and how soon they really need the capital back, so they can ask for a suitable portfolio to be designed.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.