As you would imagine I often get asked about Cash ISA rates from my clients. I get the impression that the majority of people don’t understand the effects inflation has on their cash. Is cash still King?
When you see headlines like “2% AER Guaranteed for 1 year”. In real terms if you invest at this rate you are guaranteed to lose money. Your capital is safe but inflation has risen to 3.3%, measured by the Retail Prices Index. If you are getting interest below this figure it means you are losing the spending power of your money every year. Which means you may not be able to maintain your current lifestyle or achieve your future desired lifestyle.
The new Governor of The Bank of England, Mark Carney, has already stated that interest rates won’t rise until at least the Spring/Summer of 2016 – This is further bad news for cash savers.
Although cash is usually not the most appropriate long-term growth option, cash as an asset class provides: a level of diversification to a portfolio, in particular a form of hedging against volatility; access to liquidity and the invaluable feature for many investors – the ability to sleep at night without worrying about investments losing a big chunk of their value due to market shocks. The only real additional advantage of Cash ISAs is that they are tax free but even the tax saving is so minimal.
Everyone needs a cash buffer as an emergency fund but this should be to cover say a few months expenditure and maybe for some known large purchases, such as a car or holiday. Cash shouldn’t really be considered for a medium to long term investment, which is anything over 5 years.
If you have a specific goal for retirement income, holding large sums of cash whether in an ISA or not is unlikely to help you achieve and maintain your desired lifestyle. This is especially the case where interest rates are well below the level of inflation. A carefully adopted long term investment strategy is more likely to do this which matches your attitude to risk and your required amount of capital in a future given date.
If you are holding large sums of cash, whether this be in a Cash ISA or not you should seek professional advice to see if this is what you need. We are on hand to provide you with a long term cash-flow forecast based on your future expenditure requirements and can show you what amount of capital you would need at any given point in time.