Investing a large cash sum safely in the short term – what are the options?
It’s a question we’re asked frequently. There could be any number of reasons for the windfall. It could be from the sale of a business, an inheritance from a family member who’s recently passed away. A surplus left over after downsizing your property or a gift.
The receipt of a potentially life changing amount of money is clearly a big deal. It’s important to think carefully about your options, and how this money can best help you in life.
Benjamin Franklin, whose considered counsel urges us to ‘take time for all things: great haste makes great waste.’ When it comes to making decisions about money, never have truer words been spoken. We live our lives at such a frantic pace that stopping to take stock is a dying art. Making financial decisions in haste is unlikely to bring the best result so taking some time to think things through is essential. A good financial planner will always encourage you to take your time.
Invest in haste, repent in leisure
Sadly, I’ve seen too many examples of unscrupulous advisers trying to invest individuals money the second it arrives. Little thought is given to the client‘s ultimate life goals, money is invested into the latest fad investment or discretionary portfolio which relies on expensive guesswork from an underachieving portfolio manager. Money is then returned to the client when they have had the time to think about what they really want to do, often with considerable investment losses; it’s depressing. Take your time folks, it’s my best advice.
Whatever the source, in these situations, people sometimes feel they need to make a decision there and then about what to do with the money, almost as if it’s a burden they need to unload immediately. There is a sense that the clock is ticking and making a decision, any decision, is better than doing nothing. It isn’t!
I think this response is rooted at least in part in a keenness to avoid the danger of losing any cash or savings that fall outside the Financial Services Compensation Scheme (FSCS) limit of £85,000 (see below for more details on this). You might find yourself with a large sum sitting in your current account and suddenly feel exposed, and that’s perfectly natural. But there’s a difference – and a middle ground – between wanting to protect your cash assets against another occurrence of global financial meltdown and hurriedly committing yourself to a financial course of action that you might regret.
Time, space and your own pace
We can’t overemphasise the importance of thinking carefully about financial goals and ambitions, so helping clients find the time and headspace to do this is an important part of our service. Bearing in mind that people often come into money after key events in their life, such as the loss of a loved one, it is particularly important that they’re given the support and space to take decisions at their own pace.
There are a number of short-term options open to invest your cash safely while you think things through and make plans.
Making the most of the £85,000 per-institution
Firstly, as noted above, the Financial Services Compensation Scheme (FSCS) ensures that individuals receive £85,000 of protection per UK-regulated financial institution in the event of another financial crisis, of the likes we saw in 2008. This is a per-person and per-institution amount. If you have more than one account with the same bank, you’re still only protected up to £85,000.
For amounts larger than this, individuals can split their money between a number of institutions, with none holding more than the £85,000 limit, to ensure that all their money is protected. For joint accounts, each individual gets £85,000 of protection which means the total amount covered is £170,000.
Temporary £1 million protection
Regulations introduced in 2015 give savers protection for up to £1 million for a six-month period after what are described as ‘life events’. This includes things like selling your house (although not a buy-to-let property or second home), inheritances, redundancy, or insurance and compensation pay outs that could lead to you having a temporarily high savings balance. In this situation, the higher temporary balance protection and extra window of time can be very valuable.
On the other hand, while this can be useful for the ‘life events’ listed it doesn’t cover all eventualities and has an upper limit of £1 million. Also, once the six months have passed (measured from the date on which the money is transferred into the account, or the date on which the depositor becomes entitled to the amount, whichever is later), the cover no longer applies.
Hub Cash Account Services
In recent years we’ve seen a rise in the popularity of Hub Cash Account Services. As the name suggests, the investor sets up a Hub Account, and then uses this account to direct cash into a range of different bank accounts.
These platform accounts can be accessed direct or via a financial adviser and can be set up for individual investors, businesses and charities. Providers include Insignis Cash Solutions https://www.insigniscash.com, Flagstone Cash Management https://www.flagstoneim.com/ and Cascade Cash Management https://www.cascade.co.uk/.*
The Hub account set up can offer several potential benefits. First, maximising interest rate returns. The cash platforms can offer access to market-leading and exclusive rates, empowering investors to earn more interest income. Second, spread of risk. By accessing several banks, investors can invest over a range of institutions, each with their own £85,000 limit. Third, time and hassle savings. As we know, setting up a bank account can be a painful experience. To fully protect £1 million, an individual would need to set up a minimum of 12 bank accounts; you get my point. Setting up a Hub account, and then directing funds via a streamlined application, therefore has considerable time benefits.
There are annual costs associated with setting up these accounts, typically in the region of 0.25% per annum (obviously make sure you know all the costs before proceeding). For many investors, the additional interest earned, increased provider diversification, peace of mind and time saved more than offset the annual costs.
National Savings and Investments options
National Savings and Investments (NS&I) are not a bank as such but they offer a range of cash savings and investment products that are useful places to keep your cash securely. As they are backed by HM Treasury, they offer maximum levels of security. As they say themselves, all the money you invest with them is 100% secure, always, but there are maximum investment limits across their various products. Their offerings include:
Premium bonds: With NS&I premium bonds, you can contribute a maximum of £50,000 and could receive tax-free cash prizes. Every £1 you invest buys a unique bond number. Instead of paying interest, the bond numbers are entered into a monthly prize draw for the chance to win tax-free cash prizes from £25 to £1 million. Your money is accessible to you whenever you need it.
Income bonds: With a minimum deposit of £500 and a maximum of £1 million, income bonds are a similarly secure way to invest your money but rather than prizes they offer a variable interest rate (currently 1.15%) with the interest paid to you as monthly income. They are taxable, but you can access your money at any time, and there is a minimum withdrawal amount of £500.
Further NS&I products: NS&I also offer a tax-free ISA (0.9% interest, annual limit of £20,000), a savings account (1% interest, maximum deposit of £2 million) and an investment account (0.8% interest, maximum deposit of £1 million) as options, all of which allow you instant access to your money.
If you have acquired some money and you’re unsure how you are going to use it, take your time in working through your options. While these aren’t long-term options, there are plenty of places you can save or invest it while you make up your mind, where it will remain perfectly secure until you’ve found the time and space to make a plan. When you’re ever in doubt, remember Benjamin Franklin’s words: ‘great haste makes great waste.’
If you would like some advice in investing your money for the short or long term, or in putting together a comprehensive financial plan for your future, please get in touch to find out how we can help.