Dry Powder: Where Are The Best Places For Holding Cash?

22nd Jan '11 by Isaac

31 comments 26412 reads

I am keen to generate some ideas on places that offer the best returns for holding cash. Given the current inflation levels, I'm sure most investors think holding cash is a bad idea. But, as I see it, it depends on one's reasoning for doing so. Although holding cash offers next to nothing in interest from the Banks, what it does do is provide the option to purchase cheap assets when most other investors are overleveraged & become forced sellers. That is probably the best reason for holding cash.

Do I think the debt problem in the world has been solved? No. Could this result in another crisis in the future? Possibly. Could this mean that one could buy cheaper assets at some future period? Yes.

One also has to bear in mind that, when there is one of these shocks in the system, they tend to impact asset prices for a short period, e.g. six months & then all the bargain hunters come out and bid the assets back up. Therefore one probably shouldn't really lock away one's cash for more then 6-12 months.

After some research, I can come up with the following ideas for generating the best returns on cash :

Coventry BS - 3.1% AER - You must give 30 days notice to withdraw and the minimum deposit is £1,000.
Post office - Instant Access - 2.9% AER
Firstsave 3.25% AER - Lock away your cash for 1 Year
Santander 4% AER for 13 months - Regular Saver £250/month
Lloyds Classic Account with Vantage - lock away £21k across 3 accounts and earn 4% Interest
Santander First Home Saver - Lock away up to 50K at 5%, account has a certain criteria so not everyone is eligible.

Another option is to buy FTSE 100 HYP shares yielding over 5%. I welcome further ideas and comments.

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muppetmonster

24th Jan '11

Instant access cash savings will get you up to about 2.9%pa - higher rates than that will generally be a fixed rate bond where you will have very limited (if any) withdrawal options during the bond period.

One thing I noticed is that the so called "money expert" comparison site often miss many of the rates on offer so dont rely on just one before making a choice.

I agree with Log that paying down the mortgage is often the best for most people (unless you are in a long term tracker taken out a couple of years ago) and if access to funds is required at the drop of a hat then an offset or flexible mortgage is best. Barclays (Woolwich) offer offset deals from 2.79%.

SW10 Chap - A company that lends to entrepreneurial Africans called MYC4....are you sure that C4 isnt the explosive type ! lol

doverbeach

Anyone looking immediately should consider Northern Rock 5 yr bond 4.3%. Weirdly you can get your money out with 180 day notice, no loss of interest, and you can give notice and then let it lapse.

nb For those who have stacks of the old gov backed N Rock bonds, this new one comes under the normal compensation scheme.

db

loglorry

acol - what I mean is that you take the risk of default which is not very well quantified but you don't get the higher returns. For example who is more likely to default Aviva on its preference shares or some bundle of Zopa bonds? Hard to say I know but my money would be on Aviva servicing its debt and repaying and they will pay you about 8% if I recall and the income is tax free to lower rate tax holders.

The problem is that Zopa are trying to compare their offering with that of "risk free" or near risk free deposits in things like building societies. This is just not the case though there is a lot of risk in this style of lending and worse still it is very hard to quantify.

To be fair I haven't looked at it for a while but even a 1% default rate / year in a loan book starts to make a 6% return look a bit more pedestrian especially when income is taxed.

Log

Fangorn

Hey log,

8% on Aviva bonds. Sounds interesting.Presumably they're fairly easy to buy through a regular broker. Only ask as have never purchased corp bonds despite working in that field for many years.

Ta

acol

loglorry

I certainly look upon Zopa as comparable with a high rate building society. On past form, which is all that we can really talk about, the default rates have been much less than 1% and this would be on the riskier categories of borrower - say C - where the average rates have been 10% or more. Zopa operates on the same basis as other commercial lending organisations, the difference being that their customers - either lenders or borrowors - are not ripped off like they are with either banks or building societies, leastwise in todays economic climate.

What is perhaps not 'well quantified' is the average level of future default if the going gets much tougher. As far as I am concerned this is the major risk. Over the last 5 years Zopa look very, very attractive for both savers and borrowers who have sought alternatives to banks/building societies. I was never seeking to make comparisons with stock market investments.

Ummm one could argue that the banks are the ones which have been had over by the borrowers lately but new fool them for lending on silly terms.

Less than 1% losses on 10% lending does sound attractive but again one us risking all the capital so one would expect much better than building soc returns that have UK gov guarantee.

buzzz

I'm currently in the process of moving all my equity assets into my ISA and SIPP, so I hold cash with my Broker (Hargreaves Lansdown) where it earns a pittance in interest.

However, I do hold the majority of my total assets as cash in a combination of:
Cash ISA.
I -2 year bonds
3 and 5 year RPI linked National savings (not currently available).

I've not looked at moving my cash recently, so no idea of the best place. I do however have avariation on the original question:

How would you hold cash in an ISA / SIPP, but keep it liquid and a low risk of capital loss and why?

I can think of the following:
Cash - almost nil interest with the broker.
High yield shares - risk of price drops.
Bonds - Risk of capital loss.

Regards

Buzzz

buttlaneboy

Buzz, see my earlier post re building society PIBS. I hold mine in my isa, the dividends are paid gross. OK there may be some capital loss (or gain) if you cash in before maturity but this will almost certainly be offset by the 7% tax free interest. The code for Coventry is CVB and for Nationwide NABA. As I say, worth a look.
Cheers, BLB
for more info www.fixedincomeinvestments.org.uk

Cuthbert C

25th Jan '11

First Direct are offering a regular saving account that pays 8%.

The snags are:
- the maximum you can put into the account is £300 per month
- you can only have one account per person
- after 12 months the account reverts to the standard rate of interest

The plus points are:
- a couple can have one each
- the customer service provided by FD is outstanding

The small maximum size of this account means it won;t change anybody's life, but it is still a good enough offer that it would be churlish not to take advantage - especially for those of us who are already FD customers.

djpreston

BLB

Wouldnt disagree re the attractions of PIBS and Prefs but not as a short term cash alternative in an ISA or SIPP. The possibility of needing cash quickly could expose you to a poor result in terms of capital loss (after dealing, stamp duty etc).

Unless your SIPP provider offers money market accounts then Id say its a tough problem to solve. Cash fund would probably be one of the better alterntives.

N Rock 5 year bond now closed ...

db

Floodland

26th Jan '11

A bank account earning 4% interest isn't great if inflation is running at 5% or higher. So dare I mention precious metals? It's true that they don't have quite the same characteristics as cash and introduce a new range of risks and volatility but as a hedge against inflation surely it's worth putting a proportion of cash into gold and silver? And what about non-sterling accounts? With the risk of currency devaluation in many western countries it might be worth holding Australian dollars, Canadian dollars, Singapore dollars etc. It seems to me that it's riskier to hold it all in pounds than to spread it around.

bones30

25th Mar '11

How does that work with CGT?

26th Mar '11

If you are asking if you can use any Zopa bad debts as CGT losses, the answer is no. See Q12 here http://uk.zopa.com/zopaweb/public/help/help-faqs-lending.html#tax

db

Something to keep an eye out for is a return of the NS&I Linkers - the 3yr and 5yr RPI + savings that apparently are going to make a return very soon. Will definitely be buying some of those.

Isaac

12th May '11

Index-linked Savings Certificates Relaunched

http://www.nsandi.com/savings-index-linked-savings-certificates

emptyend

Note that:

a) lower rate than before (+0.5%)

b) only 5 year certificates are available (was 3&5 previously)

c) Item 60 in the Ts & Cs:

60. No index-linking or interest will be earned in respect of a Certificate which is cashed in before the first anniversary date.

......so it isn't a short-term cash substitute, even though you can get your principal back. This condition is completely new in the relaunched product - previously you only had to hold for a month and you could get index-linking, whereas now you have to hold for at least a year.

Not compelling IMO (unlike the old ones which I'll continue to hold and roll for a while longer)

13th May '11

Yes I noticed that as well EE. Not compelling despite my continued fears that high inflation/low interest rates will be with us for the forseeable future. Rather gutted personally as I never got in on the original 3yr and 5yr series....

Mid Herts

ee, I expect to find that when existing holdings mature the offer will be to roll over into the new terms except that possibly rollover for 3 years will be permitted.

I say this because I think that the present terms have been very attractive to those who were concerned (rightly so far) about inflation particularly if they were higher rate taxpayers.

I agree that they are not attractive for short term cash which might be needed for other purposes but they have a place in some portfolios depending on personal circumstances and I expect a big take up.

MH

MH,

Don't disagree that there will be a big take-up. But if one looks forward for the full 5 years there is a case for thinking inflation will come down quite a bit and interest rates will rise - so the benefit may be much lower than it may appear at present.

Very happy that self and my adult kids loaded up on ILSCs in 2007 though, with the RPI + 1.35% terms.....accruals at nearly 7% have been attractive against near-zero elsewhere - but that won't be repeated this time, IMO

Dry Powder: where are the best places for holding Cash?

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Isaac

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