Saturday 14 May 2011

Where to Stash some Cash? (UK)

Investing cash for a fixed period in return for a high return is Level 3 of the DIY Income Investor Income Pyramid.  However, in the UK it's getting harder to decide where to put your money.

There are three things going on at the moment, which are impacting each other:
  • the rate of inflation is much higher than the Bank of England (BoE) would like, but is expected to fall fairly rapidly in future
  • the BoE base rate is much lower than it should be, given the rate of inflation - but the BoE is worried about the effect that higher rates would have on the struggling economy and want to avoid a recession (and has been pumping money into the financial system)
  • money market 5-year 'swap rates' are falling, signalling that the better fixed rate deals over this period may become harder to find.
A further development is the re-appearance of  tax-free inflation-linked certificates offered by National Savings & Investment (NS&I) - paying RPI + an average of 0.5% over 5 years (March 2011 RPI was 5.3%).

As I noted in a previous post. BM Savings are offering a similar inflation-linked bond over 5 years but at RPI + 1.5%, and a 3-year inflation-linked bond at RPI +0.75% - although these accounts are (potentially) taxable. Barnsley Building Society recently pulled a similar account.

By comparison, there are many fixed-rate deals around over 1 to 5 years. Over 5 years BM Savings (again) is offering a top-rate 5.05% over 5 years.

So, the question is: what is your view on inflation and longer-term interest rates? Even the BoE is unsure - but the reappearance of the NS&I inflation-linked account implies that they (NS&I) think this will be a better deal for the Treasury than for you.

What do you think?

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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