Cash Adviser Blog
Where to Stash £1,000,000 25th January 2012
This question was asked on a Citywire forum a few days ago and whilst there have been 49 responses to this question at the time of writing,
there was some questionable advice given. This made me think about how I would answer such a question, so here are my comments.
The writer of the question describes themselves as 'recently redundant and retired' and so from this I would deduce that they are probably
in their sixties and the £1m in question sounds like it is their entire life savings. Therefore they do not have the capacity to lose their
capital and so preservation of capital will be the primary aim.
They have identified the risk associated with putting all their cash in one bank and so default risk also needs to be addressed.
The writer mentions the need to generate an income to pay for rent and other outgoings and also a possible need to withdraw money at 3
months notice to buy a house. This means that liquidity is very important and the maximum time horizon is three months.
Suitable Asset Types
Given the need for capital preservation and the requirement for liquidity the only suitable asset types are cash deposits and National
Savings (NS&I). NS&I are backed by the UK Government and are considered to be as close to risk free as you can get. NS&I have seen an
influx of deposits recently due to a flight to quality. Their Direct Saver account, for example, pays 1.5% gross annual equivalent rate
(AER) and is taxable. The writer is expecting a return of 3% or more, so putting the whole £1m into National Savings will not meet their
income expectations and therefore cash deposits with banks and building societies will need to be included to get near to the target return.
Managing Default Risk
The Financial Services Compensation Scheme (FSCS) covers 100% of bank and building society deposits up to a maximum of £85,000 per person
per authorised firm. This means that joint investors are covered for £85,000 each and the amount held in a joint account will usually be
split 50/50 between the two account holders. It is important to note that the limit applies at the authorised firm level. In some financial
services groups there is only one authorisation across the group. For example, Bank of Scotland, BM Savings, Halifax, AA Savings, Saga and
St James Place Bank all come under the same authorisation of Bank of Scotland plc. You can check this on the FSA website as firms with the
same authorisation have the same FSA registration number. There is a
table on the FSA website giving details.
Non UK banks are not covered by the FSCS as they are covered by an equivalent European scheme which covers deposits up to €100,000,
which is approximately £83,500. This includes banks such as ING Direct, so check that you know which compensation
scheme you are covered by before investing.
The existence of compensation schemes mean that retail investors can make sure that their savings are protected by these schemes by
placing deposits up to this limit. Therefore £1m in a single name would require the opening of 12 accounts to ensure your savings are
fully protected. If you have joint accounts then only 6 accounts are needed.
Rates of Return
The good news is that whilst the Bank of England base rate has been at just 0.5% since March 2009, rates offered by banks to retail investors
have remained high in relative terms. For terms less than 3 months, the best rates are usually variable 'bonus rates' which apply for an
initial period to new investors. At the end of the bonus period, rates fall to the 'standard rate', which is typically around 0.5%. Often
immediate access rates can be higher than notice accounts because of bonuses. If you do choose an account with a bonus rate, diarise the
date the bonus expires so that you can move your money before then. Some banks allow you to give your account a name, so if the bonus expires
on 25th January 2013, call the account 25Jan2013.
The table below shows some currently available products and rates:
|Provider Name||Product||Notice Period||Gross AER||Bonus Period||Rate after bonus||Compensation Scheme|
|Shawbrook Bank ||95 Day Notice Personal Savings Account Issue 1 ||95 Day ||3.35% ||none ||3.35% ||FSCS|
|BM Savings (Bank of Scotland plc) note 1 ||BM Online Extra (Issue 1) ||none ||3.20% ||12 months ||0.50% ||FSCS|
|West Brom ||Direct Bonus account 3 ||none, max 4 withdrawals ||3.13% ||28/02/2013 ||1.75% ||FSCS|
|Nationwide ||MySave Online Plus Issue 4 ||none, max 1 withdrawal ||3.12% ||12 months ||1.51% ||FSCS|
|Aldermore note 2 ||90 Day Notice ||90 Day ||3.10% ||none ||3.10% ||FSCS|
|krbs (One Savings Bank plc) ||Internet 60 Day Notice ||60 day ||3.10% ||12 months ||2.10% ||FSCS|
|Santander UK ||e saver ||none ||3.10% ||12 months ||0.50% ||FSCS|
|Skipton BS ||Online Bonus Saver ||none ||3.05% ||12 months ||1.50% ||FSCS|
|Post Office (Bank of Ireland UK) ||Online Saver (Issue 4) ||none ||3.01% ||12 months ||1.65% ||FSCS|
|Leeds BS note 3 ||Postal Bonus Saver Issue 2 ||none ||3.01% ||31/01/2013 ||1.50% ||FSCS|
|ING Direct N.V. ||Savings Account ||none ||2.90% ||12 months ||0.50% ||Dutch central bank €100,000 (£83,581)|
|Virgin Money (Northern Rock plc) ||Easy Access E-Saver ||none ||2.85% ||none ||2.85% ||FSCS|
|Mansfield BS note 4 ||Postal Premium 4 (4th Issue) ||none, max 4 withdrawals ||2.85% ||12 months ||2.00%||FSCS|
|Principality BS note 5 ||e-SAVER Issue 4 ||none ||2.85% ||12 months ||1.65% ||FSCS|
Rates are correct as at 25th January
1 Annual interest, calculated daily. Minimum 50,000 investment. BM Savings is within Bank of Scotland plc for FSCS coverage
2 AER guaranteed to be 2.00% above Bank Base Rate Until 01/03/2013
3 Annual interest, calculated daily
4 Annual interest, calculated daily and paid on 30th June
5 Annual interest, calculated daily and paid on 1st January each year
The highest rate is for a 95 day notice account, which is 5 days longer than the 3 month maximum but this may be acceptable as the average
duration is 21 days. In this case the average rate is 3.08% over 12 accounts. If this account is not used the average rate falls slightly to
3.04% and the average duration reduces to 13 days.
Some of the accounts only pay interest annually but it is still calculated daily so it should have minimal impact. The advantage of monthly
interest is that this can often be paid to your bank account and so you do not need to make a withdrawal each month to take an income.
Two of the accounts have limits on the numbers of withdrawals so it is best to leave the cash in these accounts until it is needed to
buy the property and then close the account down. Ideally income should be taken from the lowest paying accounts first to boost the average
It is possible to find a solution that meets all the requirements but it does require opening 12 different accounts, which could be 11
accounts with £83,500 and one account with £81,500. It will be time consuming to do this, but the alternative is to use a cash
specialist to do this for you and they will charge a fee for arranging accounts for you.
A foggy picture for interest rates 31st August 2011
It will come as no surprise to you to know that I follow what is happening with interest rates pretty closely. But I have been surprised
how rates have changed this month.
The Psychology of Money 29th July 2011
I have presented a short insight called the Psychology of Money at various 4N networking groups.
The presentation is about our relationship with money and the way we make financial decisions and I use a series of questions to
demonstrate how the short cuts we use to break down complex financial decisions can bring bias into our decision making.
FSA Fine highlights issue in how risk profiling tool was used in assessing suitability 25th May 2011
The Financial Services Authority (FSA) has fined Bank of Scotland (BOS) £3.5 million for the mishandling of complaints about
retail investment products - many from older customers with little or no experience of investment products.
Are inflation linked savings a good idea? 12th May 2011
National Savings and Investments (NS&I) have re-launched their index linked savings certificates. Many commentators are comparing the
returns that people might expect to get from these certificates with fixed rate deposit accounts to see whether people are likely to "win"
or "lose"..... more
Behavioural Finance Conference: A twitter experiment 11th April 2011
I attended the Behavioural Finance Working Group (BFWG) conference at Cass business school, which was a good opportunity to update my
knowledge and network with like minded people including some from the LinkedIn Behavioural Finance group.
When is a savings bond not a savings bond? 7th March 2011
The short answer is when it is a John Lewis Partnership bond. This bond is described in the press release
as "a new five-year savings product", but reading the details shows that it is not what most people would think of as a savings product.
Where next for interest rates? 2nd February 2011
With the base rate at 0.5% since March 2009, it seems clear then that the next move will be upwards, but it's far from clear when rates
will start to rise. ..... more
Compensation Limit raised to £85,000 for deposits 4th January 2011
The deposit limits under the Financial Services Compensation Scheme (FSCS) have been increased with effect from 31st December 2010
from £50,000 to £85,000 for each person, per authorised firm. ..... more
Bank of England encourages spending rather than saving 28th September 2010
In an interview with Channel 4 News, Charlie Bean, Deputy Govenor of the Bank of England, explained that encouraging spending rather than saving was part of the point of monetary policy rather than a side effect of it.
Economy grows by 1.2% in Q2 but Double-Dip recession looms 27th August 2010
Figures published this morning by the Office of National Statistics showed that GDP increased by 1.2% in the second quarter of 2010,
the strongest quarterly growth in nine years...... more
CPI or RPI? What's the Difference? 23rd August 2010
In the UK there are two key measures of price inflation, the consumer price index (CPI) and the retail price index (RPI)
Does Inflation Matter? 16th August 2010
The simple answer is yes, but more importantly, will investment returns exceed inflation? To get growth in real terms it's the
difference between investment returns and inflation rates that is key.
The Power of Compound Interest 6th August 2010
A discussion forum on IFA Life has reignited my interest in compound interest. A post called "compelling compounding"
referred to an article with examples of the effect of compound interest on contributions over a long period of time
No easy way to beat inflation as NS&I withdraws index linked savings certificates 19th July 2010
NS&I announced that Index-Linked Savings Certificates have been withdrawn from general sale. It has also withdrawn Fixed Interest Savings
Economy grows by 0.3% 25th May 2010
Figures released this morning showed that Gross domestic product (GDP) increased by 0.3% in the first quarter of 2010.
Inflation Hits New Highs 19th May 2010
The latest UK inflation figures showed that CPI inflation for April 2010 was 3.7% and RPI reached 5.3%.
Interest Rate Outlook 27th April 2010
A number of data releases over the last week suggest that rates might start to increase sooner rather than later.
Interest Rates from Down Under 12th April 2010
Whilst the Bank of England decided to keeps rates steady at 0.5%, the Reserve Bank of Australia increased rates to 4.25% last week.
Inflation drops to 3% 23rd March 2010
Figures published by the Office of National Statistics today showed that Consumer
Price inflation fell from 3.5% p.a. in January 2010 to 3% p.a. in February.
Cash gives people an inner strength 8th March 2010
An article published in this month's Harvard Business Review finds that cash gives
people an inner strength and can reduce their physical and emotional pain.
Gloomy Outlook For Savers 1st March 2010
The picture for savings rates continues to be gloomy, with the first statistics on interest rates earned in 2010 published this morning
by the Bank of England. ..... more
MPC Minutes show inflation expected to stay high for now 17th February 2010
With inflation at 3.5%, some taxpayers will need to achieve 7% just to stand still..... more
Interest Rate Outlook 8th February 2010
With the Bank of England holding the base rate at 0.5% last week, there seems to be little prospect of rates increasing any time soon