Many people take comfort in seeing a substantial cash balance in their bank account. Cash provides security, flexibility and peace of mind. However, holding too much cash for too long can create risks that are often overlooked.
If you’ve accumulated savings through business profits, inheritance, a property sale, or simply years of careful saving, it may be worth considering whether all of that money needs to remain in cash.
As part of your advice process with your financial advisor here at Loughtons, we keep a record your cash savings and discuss these during each meeting. However, we do often find that clients have a preference of holding large amounts in cash in addition to what we consider is appropriate for an emergency fund and short term objectives.
In addition, for many UK businesses, cash is seen as a safety net — something to sit in the bank, ready when needed. A recent study reveals a worrying trend: business cash is often under protected, underperforming and overly complex to manage.
The Benefits of Holding Cash
Cash plays an important role in any financial plan whether this is personal or business cash.
Maintaining an emergency fund can help cover unexpected expenses, while cash reserves may be appropriate for planned expenditure over the next few years, such as a property purchase, tax bill or school fees.
Cash also avoids the day-to-day volatility associated with investing.
The key question is not whether you should hold cash, but how much.
The Hidden Risk: Inflation
One of the biggest threats to long-term cash holdings is inflation.
Even when cash balances remain unchanged, rising prices gradually reduce purchasing power. Over time, this means the same amount of money buys less.
For example, if inflation averages 3% per annum, £100,000 would have the purchasing power of approximately £74,000 after ten years.
Whilst savings interest can help offset inflation, it may not always keep pace with rising costs, particularly after tax has been taken into account.
Understanding FSCS Protection
Many savers and businesses assume that all money held with UK banks is fully protected. However, protection is generally limited under the Financial Services Compensation Scheme (FSCS).
Currently, eligible deposits are usually protected up to £120,000 per person (or business), per authorised banking institution.
This means that holding £300,000 with a single banking group could potentially have a significant amount that falls outside FSCS protection limits.
It’s also important to remember that some banks operate under the same banking licence, meaning the protection limit applies across the group rather than each individual brand.
The Concentration Risk of One Bank
Holding a large cash balance with a single institution can create unnecessary concentration risk.
While bank failures are relatively rare, spreading deposits across multiple institutions can help ensure a greater proportion of funds remain protected.
Unfortunately, managing multiple savings accounts can become time-consuming and administratively burdensome, particularly for individuals with larger cash holdings.
How Cash Platforms Can Help
If you hold substantial cash reserves, a cash deposit platform may offer an alternative solution.
A cash platform allows investors and businesses to access a range of deposit-taking institutions through a single account, helping to:
- Diversify cash holdings across multiple banks.
- Access competitive deposit rates.
- Simplify administration and reporting.
- Improve management of FSCS protection limits.
- Avoid the need to open and manage numerous separate bank accounts.
Finding the Right Balance
Cash remains a valuable component of any financial strategy. However, excessive cash holdings can expose investors to inflation risk, concentration risk and missed opportunities for longer-term growth.
The objective should not be to eliminate cash, but to ensure that every pound has a purpose.
For some, that may mean maintaining a larger emergency reserve. For others, it may involve spreading cash more efficiently across multiple institutions or considering whether a portion of their funds could be invested to support longer-term objectives.
Final Thoughts
If you’re holding significant cash balances and haven’t reviewed your arrangements recently, now may be a good time to do so.
A simple review can help establish whether your cash remains appropriately protected, is earning a competitive rate of interest, and is aligned with your wider financial goals.
Please contact your Financial Adviser if you would like to discuss further.
This blog is for information purposes only and does not constitute financial advice. The value of investments can fall as well as rise, and you may get back less than you invest. Tax treatment depends on individual circumstances and may change in the future.