What Now for Cash & ISAs?

It may seem hard to believe these days, but once upon a time, savers with relatively modest bank balances could still generate a decent income from leaving their money in a savings account to earn interest.  Right now, however, those days are long gone and unless and until they come back, people need to think seriously about how best to manage their money in a low-interest-rate environment.

How much cash do you need? In the real world, most people are going to need some level of cash in hand, if only in the digital sense of a positive balance in a bank account.  It is also often preferable for people to have some form of cash savings, the so-called “cash cushion” easily accessible both to deal with predictable events such as replacing household items and in case of emergencies.  Assuming you are one of these people, your options for storing your cash are: hard cash, current accounts and savings accounts.

How best should you store your cash? The answer to this question is really one of personal preference based on the practicalities of the individual’s situation.  For most people, the ideal might be to have a combination of hard cash, current accounts and savings accounts but percentage of funds held in each will be a matter of taste.  Those in the countryside, with a long trek to an ATM or bank might prefer to keep more money in cash, if they can do so safely, whereas those in cities might feel more comfortable keeping most of their money in a bank.  The question of how much cash to keep in a current account and how much to keep in a savings account will also depend on a person’s situation.  Obviously, you’ll need to keep enough in your current account to cover regular outgoings such as bills and have cash at hand for when you need it, but you probably want to keep as little as you feasibly can in a current account, since they are likely to pay little to no interest.

Cash ISAs are now, effectively, super-savings accounts When ISAs were first introduced, once you took money out, that was basically it.  You had to accept that your tax-free allowance for that year had been reduced (or eliminated).  Now, however, if you take money out of a cash ISA, you can replace it (within the same tax year), which means that it is feasible to use them as tax-effective savings accounts for the cash you need to keep readily available. Alternatives for your extra cash Once you’ve stored enough cash for immediate and foreseeable needs and emergencies, you then need to think about what to do with any other disposable funds you have.  Assuming you still have a tax-free allowance available, then putting them into a cash ISA is certainly an option and, if you have used up your tax-free allowance, then there is still the option of using a regular savings account.  At this point in time, however, neither of these is likely to generate significant returns.  Those prepared to take a little more risk might want to look at peer-to-peer lending platforms and/or the bond market.  The returns generated in these areas are both still linked to prevailing interest rates, but as you are effectively lending directly to the borrower (rather than lending money to a bank to lend to someone else), the effective returns can be much better than the returns on bank deposits, even in cash ISAs.  Those seeking the best returns, however, may well find themselves needing to look elsewhere, such as investing in the stock market and accepting the higher degree of risk in exchange for the prospect of much better returns. For investments we act as introducers only.