Finding the best return on cash with minimal risk
Cash is king, so the saying goes. Many people want to have a decent cash pile to hand, for a future purchase or a rainy day fund.
What’s more, some people will find they temporarily have a large chunk of cash they want to keep safe before spending it or investing it – those who’ve sold a house but are yet to buy their next property, or those who’ve come into a sizeable inheritance, for example.
But what’s the best return you can get on your cash with minimal risk? It depends on how much access you want and how long you’ll have until you need to use your money.
If you have sizeable sums to save then make sure you’re going to be protected, or you might need to split it between various providers (see the box later).
I WANT ACCESS WITHIN THE YEAR
If you only want your money locked up for a year, for example, when you plan to buy your next property, you’ll get less interest than if you lock up the money for longer.
Those who aren’t sure when they’ll want access can get 1.5% with Marcus, the new brand from Goldman Sachs. This rate includes a 0.15% bonus, which is whipped away after 12 months, at which point you’ll need to see if you can get a better rate with another account.
You open the account online and can invest up to £100,000, but you can withdraw money whenever you want. So at this rate on a £50,000 investment you’ll get £750 in interest after a year.
If you’re willing to lock up cash for one year and not have any access to it, you can boost this return to 2.2%, with the one-year bond from Bank of London and The Middle East.
This isn’t strictly an interest rate, as the bank operates under Islamic finance rules, so it’s an expected profit rate. On £50,000 that would give you £1,100 a year in interest.
If that feels a bit complicated to you, you can get 2.03% from Atom Bank, which is an app-only bank. If you want a simpler account that you can open in branch, Metro Bank pays 2% on its one-year bond.
I’M WILLING TO TIE IT UP FOR THREE YEARS
If you tie up for longer you get more in interest – because the bank knows it can rely on your cash for a longer period.
By locking up the money you’re assuming that interest rates won’t shoot up dramatically in the intervening period. Likewise, if you take the view that rates are going to rise in the next year, and so you stick with a one-year account, you’re at risk of interest rates falling and getting a lower rate when you come to switch accounts in a year’s time.
For a three-year fixed rate account you can get 2.52% with Al Rayan Bank, which operates to the same aforementioned Islamic finance rules, and needs £1,000 to open it. You can’t make withdrawals on this account during the savings period. For a bank not under Islamic finance rules, your best bet is Tandem Bank’s three-year fixed saver account, which pays 2.4% on up to £2.5m.
I’M WILLING TO TIE IT UP FOR FIVE YEARS AND TAKE MORE RISK
If you know you won’t need access to the money and you’re willing to move out of cash accounts and into bonds, you could earn a bit more money, depending on market conditions.
The top five-year fixed rate cash account pays 2.75%, with Bank of London and The Middle East, or 2.65% with Secure Trust Bank.
If you want to beat these rates via investing, you need to be fairly confident that you’re going to earn more in the bond market to make it worth the extra risk.
Funds will help to spread the risk, as they will be able to buy up a number of bonds from different companies or governments, meaning that if one defaults it should only affect a small portion of their money.
What is my safety net?
The Financial Services Compensation Scheme will provide compensation if something happens to the bank or building society where you’ve got your money.
You’re covered for £85,000 per person, per bank, building society or credit union – so if you have a joint account you’re covered up to £170,000.
This means that ideally you don’t want more than £85,000 with each provider, even if it’s spread across different accounts. You also need to look out for different brands that are owned by the same institution, for example First Direct is owned by HSBC.
However, you could get higher protection for temporarily high balances. You get this protection up to £1m per person for up to six months based on certain events – the most common one is where you sell a house and have the money in cash for a short period.
Other reasons include an insurance payout or compensation, inheritance, a lump sum as a result of divorce, or a redundancy payout. You might have to provide some documentation to prove the reason for the temporarily high balance.
One option is Royal London Corporate Bond Fund (B3MBXC4), which had a yield over the past 12 months of 3.7%. The £1.3bn fund invests in a number of different company bonds, from HSBC and Lloyds to Thames Water, for a relatively low cost of 0.37%. Over the past five years it has delivered a total return (so price return plus income) of 18.2%.
Another option is Allianz Gilt Yield Fund (3138339), which invests in UK Government bonds. These are typically considered to be safer than corporate bonds and so it has delivered a lower total return over the past five years of 11.2%, with a 12-month yield of 1.37%.