We all like to have a bit of money tucked away in case of emergency. Expecting the unexpected is a sensible approach to take – having the money to pay for urgent repairs to your home, to have on hand for any unplanned purchases or to dip into if planning a big holiday provides peace of mind.
However, how much cash do you really need to keep in reserve?
If you’re receiving a regular income from working or drawing down from a pension, your cash funds can quickly accumulate. Upon review, we sometimes find that clients have cash funds well in excess of even a generous emergency fund!
We all know that interest rates on cash are pitifully low at the moment. Here are 5 ways in which you can better use surplus cash reserves.
Explore your ISA options
Although lots of people like the straightforward nature of cash ISAs, there are now so many more options to consider. If you are under 55 and still working, you might want to consider a Lifetime ISA. Alternatively, if you anticipate saving for more than 5 years, a stocks and shares ISA is statistically likely to deliver a return on investment. These can also be a good bet as any growth in the value of the shares, or any income you receive, is tax-free. If you’d like to put some money aside for younger relatives, JISAs can be good savings vehicles.
Remember that any contributions made into an ISA held in your name count towards your annual £20,000 ISA limit.
Investments
Investing directly in the stock market comes both with risks and potentially significant rewards. The markets have enjoyed a good run over the last 12 – 18 months, delivering generally strong returns. Whilst investing in the markets can be a bumpy ride, especially to the unexperienced investor who lacks access to all the tools a professional analyst has, the long-term results speak for themselves. However, due to volatility in the markets, if you want the flexibility of accessing your money in the short term, investing in the stock market may not be the best route to take.
Top up pensions
Personal pension contributions can significantly reduce income tax liability. There are a number of ways in which tax relief can be achieved but, most commonly, basic rate tax at 20% is automatically claimed from HMRC by your personal pension provider and added to your pot.
If you’re a higher or additional rate taxpayer, you can claim further tax relief from HMRC.
Business cash
Cash doesn’t only mean money sat in your personal account – if you have a business, large amounts of cash in your business account could be put to good use. For example, making either regular or lump sum payments into a pension rather than drawing down as dividends has many positive outcomes. Not only can you save income tax , you are also moving money into an environment free from Inheritance Tax.
Spend it!
Yes, you heard us right! Having a ‘saving’ mindset is commendable, but not if it’s to the detriment of enjoying life while you can. After all, money is only one source of wealth – experiences and living a fulfilled life is another (arguably better) one.
To discuss any of the above strategies, please contact your usual adviser.