Cash is crucial for emergencies but it’s a calamity for growth – advisers comment on cash holdings

The Bank of England has raised the base rate twice in recent months to contain inflation, which rose to 5.5% in January according to official data published this morning by the Office for National Statistics.

With Threadneedle Street expecting inflation to peak at 7.25% by April, more rate rises are almost certainly on the cards during 2022. In theory, this should be a reason for the UK’s beleaguered savers to rejoice. In reality, inflation is so high that the prospect of real returns on cash is little more than a pipe dream.

So what are advisers recommending to their clients when it comes to cash in the current climate?

Joshua Gerstler, chartered financial planner at Borehamwood-based The Orchard Practice, doesn’t beat around the bush: “Get your money out of cash. Inflation is eroding the value of your savings every day. Once you have enough in cash to cover any emergencies, the rest should be invested in a well-diversified global equity portfolio.”

Graeme Inglis, chartered financial planner at Scotland-based Poise Financial Planning, agrees: “I would always recommend holding some funds in a bank or building society account for emergencies. But any money in excess of this should be reviewed in line with a person’s attitude towards risk and reward. For most people, good options for growth over the medium to long term are pensions and ISAs. Both of these arrangements have tax benefits as well as giving the opportunity for growth in excess of interest rates.”

Scott Gallacher, a chartered financial planner at Leicestershire-based independent financial advisers, Rowley Turton, shares much the same view: “If you want to avoid your money being eroded by inflation, especially this level of inflation, you’ll need to give up the certainty of cash deposits in favour of the ups and downs of investing. Of course, investment isn’t without its own risks and you should speak to an independent financial adviser who will be able to recommend the most appropriate portfolio for you.”

What all appear to agree is that, while emergency cash is a must, once you’ve got enough savings put aside to cover the unexpected, investing is the only real way to keep returns real. Cash may be king in the world of business, but in the savings world right now it’s more court jester.

Antonia Medlicott, Finance Editor at the financial comparison website, InvestingReviews.co.uk, sums it all up neatly: “Inflation has got savers in a stranglehold. Even though interest rates are edging up, the rate at which inflation is rising is negating any of the benefits. Money left in a standard bank savings account is taking an absolute battering. With inflation so high, this ISA season is going to leave a lot of investors scratching their heads as to where, and in what asset class, to invest. UK savers and investors are seeking real returns but the quandary is where to find them.”

For many people, financial advice in order to find those returns has never been more important.

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