Should I move additional cash into investments?

Five key questions to consider

With the increase in inflation and interest rates over the last two years, coupled with market and economic volatility, you may have been tempted to consider the ‘safe haven’ of cash savings over investing. But were you accounting for the erosive effect that higher inflation levels would have on the value of your savings?

With inflation now beginning to subside and interest rates currently on hold and estimated to fall in 2024, is now a good time to move additional cash into investments? And if you want to keep cash savings how can you ensure it is working hard for you by maximising tax-free benefits? To help answer these conundrums consider the following five questions.

1. Should you invest some of your cash?

Diversified investment portfolios tend to outperform cash over the long term. To illustrate this, take 90 seconds to find out how inflation is eroding the real value of your cash savings, versus the real return of four of Canaccord Genuity Wealth Management’s (CGWM) model investment portfolios.

2. Is the amount you have in cash appropriate for your circumstances?

There is no ‘one-size-fits-all’ answer to this question, and it is very much a personal choice – some experts recommend three months’ expenditure, others up to a year’s worth. In addition, any short-term commitments you are aware of – home improvements for example – should certainly be retained in cash.

It is sensible for many people to keep a cash buffer, but since this will be at the mercy of inflation, some savers may opt to hold the bare minimum amount in cash to avoid incurring losses on the value of their money.

3. Have you maximised your pension savings in recent years?

Notwithstanding the constant tinkering with legislation over recent years, pensions are still a very tax-efficient investment for the majority of people, with tax relief available on contributions, as well as tax-free growth within the fund. The proposed removal of the Lifetime Allowance, along with the rise in the amount that can be added every year, means that some people may be able to add more into their pensions and potentially avoid penal tax charges – while wrappers themselves can help protect against income tax, capital gains tax, and potentially inheritance tax.

For an overview of recent legislation changes and how you might be impacted, our colleagues at CGWM have prepared a guide which you can read here. Navigating pension legislation can be complex, and its implications vary depending on your individual circumstances. If you’d like to talk about your pension savings, reach out to your Wealth Planner or request a complimentary consultation with one of our specialists.

4. Have you made use of your ISA allowance this year and those of your family (assuming you’re feeling generous)?

Everyone aged 18 and over can invest £20,000 per annum into an ISA; those under 18 can invest £9,000 each year. For those aged between 18 and 40 you can also invest £4,000 of your annual ISA allowance into a Lifetime ISA, with the government adding a 25% bonus to your savings, up to a maximum of £1,000 per year. When you turn 50 you will not be able to pay into your Lifetime ISA or earn the 25% bonus (although you will still earn interest or investment returns). ISAs grow tax free, whether invested in cash or other asset classes like stocks and shares, and the long-term effects of this tax-free growth can be significant.

From 6 April 2024, ISAs will become a bit more flexible. You will be able to open and contribute to multiple ISAs of the same type during the same tax year and also partially transfer an ISA. Currently you can only subscribe to one stocks and shares and one cash ISA and you must transfer the entire subscription.

5) Are you making the most of your income allowances?

Often, we find people squander the opportunity to use a spouse or partner’s lower income tax rate, or even their Personal Savings Allowance (currently £1,000 for the 2023/24 tax year), by holding investments or cash balances in the higher earner’s name. This could mean, for example, paying tax on interest at your marginal income tax rate when the spouse would pay just 20%, or even no tax at all. There is no limit on the amount of money that can be transferred between spouses, so you might want to consider whether transferring holdings to or from your partner would benefit your family.

Our Gilt Portfolio Service offers tax-efficient fixed interest investing via a fully tailored discretionary portfolio of UK short-dated gilts. For UK taxpayers this creates an opportunity to make capital gains without paying capital gains tax (CGT), creating particularly attractive gross returns for higher-rate taxpayers.

Few savers will be untouched by inflation. But by asking yourself the questions above, you can mitigate the effect of inflation by making sure your money is working as hard as possible to earn inflation-beating returns.

Find this useful? You may also be interested in:

• Our investment outlook for 2024
• Why healthcare and infrastructure sectors are still key portfolio components
• Balancing the risk and rewards of investing

Speak to one of our experts

If you would like to discuss what to do with your cash savings, please get in touch with us or email enquiries@adamandcompany.co.uk.

Please remember, if you hold an account with Adam & Company, you can check your portfolio value at any time, through our online client portal or by getting in touch with your Investment Manager. 

For further information on any of the terms used in this article please see our glossary of investment terms.

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

This is not a recommendation to invest or disinvest in any of the companies, themes or sectors mentioned. They are included for illustrative purposes only.

The information contained herein is based on materials and sources deemed to be reliable; however, Adam & Company makes no representation or warranty, either express or implied, to the accuracy, completeness or reliability of this information. Canaccord is not liable for the content and accuracy of the opinions and information provided by external contributors. All stated opinions and estimates in this article are subject to change without notice and Adam & Company is under no obligation to update the information.