Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

The cash conundrum – is your money better off invested?

Inflation has started to hit retailing in the UK, with higher fuel and food prices affecting the way that people shop. Inflation as measured by the Consumer Prices Index remains at 2.3%, above the Bank of England’s target of 2%. Inflation erodes the real value of your savings over time – and savings held in cash accounts with low interest rates often fail to keep up.

Lee Dooley Lee Dooley
04 May 2017
Pound coins laid flat

Cash – the ‘risk-free’ option?

It’s often said that the pain of loss far outweighs the joy of gain. This sentiment explains statistics from HMRC, which show that around 80% of ISAs in 2015/16 were cash accounts. Many regard saving in cash as a safe option and demonstrate a degree of apprehension for the stock market.

But introduce inflation into the equation and the case for cash doesn’t always hold up. This is because interest rates over the last several years have been low – not enough to counter the effects of inflation. Cash languishing in such accounts loses value over time, with its spending power decreasing.

We believe that it’s wise to keep some money saved in cash in case of redundancy, illness or other possible emergencies. Our general rule is six months’ worth of salary. But beyond this, you could explore investing as the next option for other savings you currently hold in cash.

The potential of the stock market

The economic landscape post-2009 has kept many fearful of the stock market, which often falls with bad news. But when you look at the markets over the long term, it’s clear that short-term falls simply reflect recent events and don’t predict how stocks and shares will perform over the following decade.

Equities in particular have the potential to generate higher returns than other types of investment such as bonds, property and cash. But equities are traditionally seen as the riskiest type of investment, which is why we believe that choosing the right funds (and fund managers) is so important.

The right fund managers will take global events into account – such as what Donald Trump is tweeting about and the latest economic news from China – but they will not be blinded by them. They will see through the noise and pick companies for their portfolios that they believe will add value over time.

And holding your investments in tax-efficient accounts, such as stocks and shares ISAs and Self-invested Personal Pensions (SIPPs), means more of your money will be sheltered from the taxman.

Top-rated investment funds

We conduct extensive research on fund managers to identify those who have genuine skill, rather than simple luck. For example, you could use Our Top ISA Investment Ideas guide when choosing investments for your ISA. This guide gives you investment inspiration by listing funds from different sectors, including Terry Smith’s Fundsmith Equity fund and Neil Woodford’s Woodford Equity Income fund. Funds featured in the guide are managed by proven time-tested managers and remain popular options for those who accept the long-term case for investing. You could also read Our Top-rated Funds for a comprehensive list of all the funds that we rate highly.

We’re here to help

Our full range of investment guides can help you get the most from your investments. If you would like to talk to a member of our team, call us on 020 7189 2400, request a call back or email and we will be in touch.

Important information

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Past performance is not a guide to future performance. SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you then a SIPP might not be right for you. Please contact us for guidance or advice if you are unsure whether a SIPP is right for you.