In a bid to bring high inflation under control, the Bank of England (BoE) base rate has been rising since December 2021. Back then, it stood at just 0.1%. But after 15 meetings of its Monetary Policy Committee (MPC) – incorporating 14 consecutive rises – the September meeting confirmed the base rate is holding at 5.25%.

After decades of poor rates for savers, this increase is beginning to be passed on via the cash savings rate you receive from your high street bank.

According to Moneyfacts (as of 19 September 2023), the best easy access cash savings rate is currently 5.05%. A one-year fixed-rate bond, meanwhile, could pay as much as 6.1%.

These rates are great news for savers, but they don’t necessarily mean it’s time to ditch your investments in favour of easy access cash savings.

There are several important benefits to investing, and some pitfalls of cash, that you’ll need to consider.

Here are just five of them.

1. Inflation is expected to remain above the BoE’s target until early 2025

Inflation reached a 41-year high in October 2022 when it peaked at 11.1%. It is now falling.

The latest figures from the Office for National Statistics (ONS) confirm that inflation for the 12 months to August 2023 was 6.7%.

This remains higher than the best savings rates. And while inflation is expected to continue falling, it isn’t expected to reach the BoE’s own 2% target until at least April 2025.

When your cash saving rate is lower than inflation, the money you hold in cash is effectively losing value in real terms.

2. It’s time in the market, not timing the market that counts

You’ve likely heard us share this message before, but it bears repeating.

While current improvements to cash rates could mean the grass looks greener elsewhere, you’ll need to consider the opportunity cost of moving your money to cash. 

Savings rates might be high currently, but you could miss out on higher returns when the markets rise in the future.

3. You could be hit by tax charges on interest and gains 

The cash you hold outside of tax-efficient wrappers could become liable for charges.

You might pay tax on interest that exceeds your “Personal Savings Allowance”, for example. The amount of interest you can earn tax-free is linked to your Income Tax band.

You can earn £1,000 in interest tax-free as a basic rate taxpayer. On the higher rate, your Personal Savings Allowance drops to £500, while those on the additional rate have no allowance at all.

You could also find that you have Capital Gains Tax (CGT) to pay when you divest funds. This issue is especially topical currently; the chancellor used his 2022 autumn statement to slash the CGT annual exempt amount from £12,300 in 2022/23 to £6,000 from April 2023. It is due to half again in 2024/25, to just £3,000.

It’s important to remember that wrappers like ISAs can shield your money from Income Tax, Dividend Tax, and CGT. 

If you have cash holdings, now is a great time to think about where they are kept, and if it’s the right place for you.

4. Avoid knee-jerk reactions and stay focused on your long-term plan 

Emotional decision-making might mean you move money out of investments into cash. Moving away from your plan can have huge long-term consequences.

The Guardian recently reported that the UK’s Covid recovery was stronger than originally thought. The new figures cover the last three months of 2021 and show economic growth of 0.6% compared to pre-pandemic levels.

Despite this adjustment, forecasts of a recession have dogged the government since coronavirus restrictions were lifted. The BBC reports that the economy is expected to shrink by 0.2% in 2023. The UK will, though, narrowly avoid a recession.

Periods of economic uncertainty are reflected in UK and global stock markets and can spell nervous times for investors. But remaining patient and avoiding emotional, knee-jerk decisions is key.

Your investments are aligned with your long-term goals. If your dream retirement hasn’t changed, your plans to get you there don’t need to either. 

We can provide help and reassurance, so get in touch.

5. Be aware that some of your cash holdings might not be protected

If you currently have large cash holdings, or large investments that you are considering moving into cash, you’ll no doubt be aware of the Financial Services Compensation Scheme (FSCS).

The FSCS protects up to £85,000 of your money if the organisation where it is held fails.

You might find that you need to move your cash into different accounts, owned by different organisations, to ensure that all of your cash holdings are protected.

This could prove to be an administrative hassle, with multiple switching procedures and requirements. 

Get in touch

With decades of experience, our Chartered Financial Planners have the expertise to help you plan your retirement your way. If you have any questions, please get in touch and speak to us today.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.