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Understanding cash and its role in your financial plan

Mind the gap – holding cash will erode the value of your savings

A key part of any financial plan is to consider how you can protect your hard-earned savings from the ravages of inflation.

With the Bank of England (BoE) raising interest rates to 5% in July 2023, savers should be seeing greater returns from their cash. However, many banks and building societies, while quick to raise mortgage rates, have yet to meaningfully up their interest rates on products such as cash ISAs.

As a result of this inaction and inflation remaining stubbornly high, savers are realising a loss of more than 5% due to the gap between saving rates and inflation, according to our analysis.

The chart below shows the gap between interest rates and inflation this year is at its largest for more than a decade.

Don’t miss out – stock markets tend to rally after high inflation

Markets can turn quickly and being out of the market for even a short period of time can significantly reduce your returns.

Interest rates and inflation are currently higher than they have been for some time. However, history shows that after about 18-24 months, interest rates will usually dampen inflation, and both will start to drop. 

History has shown that when this happens, stocks and shares typically begin to rise. Markets can turn quickly and missing the best days can significantly reduce your overall returns. Remaining invested, if you can, will maximise your chance of benefiting from this potential future increase.

The chart below shows that staying invested in global equities over the past 30 years, could have delivered a potential return more than four times greater than that of an investor who missed the best 25 days during the same period.

Source: Quilter Investors as at 30 June 2023. Total return in pounds sterling over period 30 June 1993 to 30 June 2023. Based on initial investment of £10,000 into the MSCI All Country World Index. The information provided is for illustrative purposes only and doesn’t represent the past performance of any particular investment. It is not possible to invest directly into an index.

Part of the plan – cash is often already included in a diversified investment portfolio

If you invest in a Quilter WealthSelect portfolio, your portfolio manager will already have some cash exposure in your diversified portfolio (depending on your appetite for risk). There will typically be a higher allocation to cash in lower-risk portfolios.

The charts below show the different levels of cash held in two of the WealthSelect Managed Portfolios.

When investing in cash, portfolio managers will usually invest in money market funds, which have the benefit of being managed by a professional. This approach also gives the portfolio manager the flexibility to move out of cash and into other assets quickly if market conditions changes.

Beware of the taxman – general savings accounts are not tax-free

If you are investing outside of a cash ISA, interest earned on banks and building society savings accounts are subject to tax. Those with wages, pension, or other income above £17,570 will only have the Personal Savings Allowance (PSA) available to help them before they start paying tax on the interest they receive3. The PSA is £1,000 for a basic rate taxpayer, £500 for higher rate taxpayers, and £0 for additional rate taxpayers. Anything earned above the PSA will be taxed at your marginal rate.

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Important information

Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rates may cause the value of overseas investments to rise or fall.

Please be aware that calls and electronic communications may be recorded for monitoring, regulatory and training purposes and records are available for at least five years.

The WealthSelect Managed Portfolio Service is provided by Quilter Investment Platform Limited and Quilter Life & Pensions Limited. “Quilter” is the trading name of Quilter Investment Platform Limited (which also provides an Individual Savings Account (ISA), Junior ISA (JISA) and Collective Investment Account (CIA)) and Quilter Life & Pensions Limited (which also provides a Collective Retirement Account (CRA) and Collective Investment Bonds (CIB)).

Quilter Investment Platform Limited and Quilter Life & Pensions Limited are registered in England and Wales under numbers 1680071 and 4163431 respectively. Registered office at Senator House, 85 Queen Victoria Street, London, United Kingdom, EC4V 4AB. Quilter Investment Platform Limited is authorised and regulated by the Financial Conduct Authority. Quilter Life & Pensions Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Their Financial Services register numbers are 165359 and 207977 respectively. VAT number 386 1301 59.

Quilter uses all reasonable skill and care in compiling the information in this communication and in ensuring its accuracy, but no assurances or warranties are given. You should not rely on the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation.

Data from third parties (“Third-Party Data”) may be included in this communication and those third parties do not accept any liability for errors and omissions. Therefore, you should make sure you understand certain
important information, which can be found at third-party-data/. Where this communication contains Third-Party Data, Quilter Investors cannot guarantee the accuracy, reliability or completeness of such Third-Party Data and accepts no responsibility or liability whatsoever in respect of such Third-Party Data.

QI 26320_28_3972/July 2023

All Images and content shown are reproduced with permission from Quilter Investors.