Savings rates have trebled in 12 months, and UK savers can earn over 5 per cent on one-year deposits. Head of strategic research, Duncan Lamont, discusses whether it makes sense to cut risk and stick to the safety of cash.

With cash savers benefiting from the highest returns in almost two decades, Duncan Lamont at Schroders said this week that investors are now rethinking the role that deposits should play in wider portfolios.

According to Lamont, some popular accounts such as cash ISAs are currently paying over 5 per cent. “The rise in returns has been rapid, with rates today many times higher than a year ago. Unsurprisingly, savers are committing more to cash ISAs than at any point in the past five years,” he said.

After a long spell in which nominal returns on cash were virtually zero, investors are now rethinking the role deposits should play in wider portfolios. “Schroders’ May 2023 survey of financial advisors – coming as the Bank of England raised interest rates for the 12th time since the start of 2022 – found nine in 10 advisors were having conversations with clients about long-term investing versus cash deposits,” he continued.

Are investors right to reconsider cash?
“All savers’ circumstances are different, and some may have excellent reasons to be holding cash. But just because savings rates are rising does not mean cash is keeping pace with inflation,” Lamont said. 

“Cash returns after inflation – or “real” returns – remain negative, even though rates have risen strongly,” he added. Negative returns mean losses. And the jump in inflation since early 2022 means that the value of cash is now eroding at a faster pace than for most of the previous decade, even if the cash earns today’s top available rates. So, for many, he believes that the key question of where to make long-term investments remains as relevant as ever. In fact it is even more important.

Cash or equities: what are the chances of beating inflation?
“The certainty offered by cash lies only in its nominal value. £100 today will still be £100 in future years. There is no certainty its spending power will hold up, however. Low inflation will see the money retain its spending power to some degree, but high inflation will erode it quickly,” he said.

“Over short periods cash is likely to fare better against inflation. Over long periods, cash fares worse, even where inflation is relatively low,” he added.

Schroders figures show that over very short periods – three months or less – there has not been much difference in the likelihood of cash or shares beating inflation. But for longer periods, the gap widens conclusively. For every 20-year timeframe in the past 96 years, the firm said that equities delivered inflation-beating returns.

“So while stock market investments may be risky in the short run, when viewed against inflation they have offered far more certainty in the long run,” Lamont continued.

Wrapping up, he said that different risks attach to both cash and stocks and shares. “Cash is far from a risk-free asset: even at today’s best available savings rates, deposits are likely to lose real value. And, as our data shows, cash can deliver real losses over longer periods too, including the past two decades. But shares also carry risk, especially when held for shorter periods,” he added.