Is Cash only short-term?

Is Cash only short-term?

Date: 14 November 2023 | By: robertsb

Cash is a valid home for your capital, but only for the short-term 


The currently available returns from interest bearing bank and savings accounts offer their highest returns for decades, and which has been welcomed by savers as this ‘risk free’ option is now offering some value for capital. 

Between January 2009 and August 2023 the rate of interest available on cash was at record lows, held at that low level by Bank of England Base rates. 

 When the level of inflation exceeds the rates of interest available cash savers are worse off in terms of a gradual erosion of their capital’s purchasing power. 

 The 14 year period of ultra-low interest rates become so entrenched that some savers went looking for greater returns in investments, taking some higher risk in the process, and in order to preserve the value of their capital over time.  

 The last 12 months has seen a remarkable turnaround with the Bank of England increasing base rates by 3% p.a. At the same time, the inflation rate (as measured by the Consumer Price Inflation index) has fallen.  

 Although interest rates remain lower than inflation the difference has reduced, and the expected trend is for that gap to narrow further as we see inflation falling under control. 

 In general terms, what we need to see moving forward is for cash interest rates to moderate at around 5% p.a. That will mean that savers cash will be able to match, and hopefully slightly exceed the inflation rate, and therefore maintaining its purchasing power. 


The advantages of holding cash for the short-term 

 The first main advantage is that it is a very secure investment as the risk of not receiving back your original capital (i.e., the principle savings amount) is incredibly low.   

 For UK authorised Banks and Building Societies the security is the Government Deposit Guarantees and the Financial Services Compensation Scheme capped limits (i.e., of £85,000 per account holder/institution) 

 For capital held in Money Market funds or directly in short-term Fixed Income Securities the security revolves around the creditworthiness and financial security of the issuing Company.  

As those types of funds typically invest in Government and highly independently credit rated A, AA or AAA issues, the saver is in effect lending to large established entities with long standing track record of repaying the principle capital. You therefore have a level of certainty and the return that you’ll received at the maturity date.  

The second advantage of holding for the short term is liquidity as by selling their fixed income security or withdrawing the funds held on deposit, savers are generally able to receive their capital back quickly and at no cost or penalty. For accumulating wealth and meeting retirement needs other assets are possible better suited. 

Returns on cash savings are during most economic conditions generally lower than other ‘investment’ asset classes over the medium to long term, (i.e., over 3-5 year periods). Savers do not have to worry about the country’s economic growth,  but conversely this means that cash does not offer a sustainable long term strategy for those who have a medium to long-term time horizon. 

In a recessionary environment and stock market falls, holding cash offers no effective diversification benefit and most economic crises result in lower interest rates, and hence lower returns on cash. 

Fixed rate cash deposits are only available for short time periods and change when the Bank of England responses to make to changes to adapt to current conditions. Fixed income securities are slightly different in that they offer much greater certainty of return on a buy-and-hold basis, where the terms available extent to up to 10 years.

Recent events mean that cash has now, after a long 14 year period, reverted to its previous role as a ‘natural home’ for short term and accessible savings. The advantages of combining those cash savings with a selection of investment assets, to provide the necessary longer term growth and diversification for longer term wealth generation and a sustainable retirement should not be ignored. 


Mark Howse, Senior Financial Planner, Roberts Boyt Limited – 13th November 2023.