I was prompted to read the explanation offered by NS&I (National Savings) on their web site after being alerted to it by my co-attorney who was trying to deal with a savings certificate maturity for my elderly father. In essence it says they are too busy to cope because everyone wants to put money with them.
I personally have long ago given up looking for the best interest rate on my deposit money, but I don’t have that much outside of my pension fund and trading portfolios. Some of my readers will have large sums on deposit and want to see some return on it. Would you be dealing with NS&I when their ISA savings rate (which seems to be their main promotion) is 0.1%?
I realise, of course, that most people will treat the 1% tax free return on the Premium Bond prize fund as enough to take a punt. The limits for Premium Bond investment are now generous enough to soak up quite a large chunk of reserves. I suspect it is sale of these bonds and the potentially accident prone (from an administration point of view) decision to switch prize payment to direct bank credits only that is behind NS&Is recruitment of an extra 260 staff.
With even august and secure institutions like Nationwide Building Society offering 0.5% (according to my quick scan of Moneyfacts) on their triple access account, then there would seem to be no reason to put money with NS&I other than in Premium Bonds. Or is there?
I suspect the large number of people who currently have much more money to hold on deposit than the FSCS protection of GBP85000 may get very tired of dividing their money up between multiple institutions.
I notice that many of the best interest rates on offer as shown on Moneyfacts are from some pretty new or specialist banks. One would need to know something about their security before making large deposits with them, I suggest.
One I checked out just because I knew of it from some years back – as a lender. That was Hampshire Trust plc. It appears to be totally sound as a business but it does specialise in development finance lending. Its reserves are well in excess of the statutory minima and it has a good chunk of liquidity on call with other banks. Having said that, in my personal judgement, a severe and sustained collapse of the property market might leave this bank with serious problems. You may take a different view after reading the company’s accounts.
My suspicion is that with interest rates being low and being likely to stay low, some people are valuing security and the certain ability to get their money back as more important than the odd fraction of a percent on the interest rate.
If you have the time and can do the research, and don’t mind dividing your money into GBP85k pockets, assuming you have more than that, you will get rewarded with a few quid in interest (after tax on larger sums, of course).
But I reckon that NS&I is sucking in plenty of funds from the public to help with the governments record borrowing, and in the main it is borrowing from citizens at virtually no cost. NS&I is the only absolutely secure home for a surfeit of cash.
Hi Mark – Citywire have just published a short but cautionary article on SPAC’s – pretty much echoing your take on the subject.- there must be alot of spare cash sloshing about in the system! May I link NS&I to a question please? Whilst NS&I may well be a secure home for a surfeit of cash in a low interest rate world, – what should I be doing to cope with and benefit any investments in a world of low interest rates but rising inflation, even (a word I’ve not heard recently) possibly stagflation?
Good question Greg.
Stagflation is indeed a possibility insofar as it is expected to arise when government actions increase the supply of money (like now) and there is very little economic growth. The extra money is expected to flow through into higher prices.
I have questioned this theory for some time now. Not that it is wrong per se, but that the money flows through into measured inflation – which is the price of consumer goods and services. I am pretty sure it flows down a different outlet – into the stock market and inflates the price of equities.
That directs us towards the usual (and manifestly true) answer to your question. To secure long term protection against inflation you have to buy ‘real’ assets, that is those that get priced up with inflation. That excludes fixed income assets (apart from the small amount of index linked securities in issue) because the income you secured when you bought them will gradually look less and less attractive. It also excludes deposits most of the time because although interest rates will rise in an inflationary climate, they won’t often be high enough to cover the reduction in the spending power of the base capital.
So one is left with equities, physical property and precious metals. The pricing of gold is very sensitive to multiple factors as I have written before and therefore it is not an easy selection, but it can be shown to have an inflation proof value over long periods. Commercial property is a very cyclical asset, so in a time of stagflation, it could be losing value and in a world where a great deal of commercial activity is become dematerialised, it would be a brave investor who piles into property investment without considerable care in the selection of assets.
That leaves equities. Because logic says that company profits would go up in nominal terms if they can increase prices at least as much a costs (more likely with the weakening of labour negotiating power globally), then dividends will rise. As we know, the main factor in share price growth, long term, is dividend growth.
However, at the moment we have an extremely anomalous situation in equity share pricing where the market is valuing shares purely on the basis of innovation and expected structural change. That means that the prospects of the prices of many shares that now make up heavy weightings in most global large cap indices continuing to grow steadily into the future must be assessed as remote! They are more likely to fall back if there is a recession and money would ritate into non-cyclical defensive stocks, like tobacco and booze, household goods and pharma.
There are plenty of other shares that are better value, but some argue that value investing is dead (Peter Hargreaves regurgitated this idea in a Blue Whale newsletter only last week. I beg to disagree.
So I suggest that one ought to own equities as an alternative to cash, but only to buy at the right price. That is much, much easier to do after a correction (as in late Spring 2020), so retaining cash and paying the opportunity cost (insurance premium) of inflationary losses is worthwhile in my opinion, so as to have money available to pick up good value holdings in the future. Patience is necessary for investors in the market, but I think at the moment, patience is useful if you have a deal of money out of the market!