Paul Lewis: The cash conundrum

Every week or so I get an email offering me a sure-fire return on my money of 6%, 7% or 8% a year.

All I have to do is secure the right to buy a canal-side property with a 20% deposit on the £115,000 apartments, which are only a few minutes from shops and offices.

They haven’t been built yet but the artist’s impressions show spacious 40m² units with lots of glass to enjoy the views of the water.

I am told that property in this northern city is rising in price by 9.7% a year, yet still well below the national average.

And local rental increases are even bigger. Hence the guaranteed return.

Unlike the apartment pedlars, the firms making these promises are regulated

These emails have saved me a fortune. I have never sent them a penny. The same principle has won me thousands on the National Lottery — I’ve never bought a ticket.

But recently a much more tempting offer has come my way: a guaranteed return of 4.55% a year for five years; capital not at risk.

On the maximum safe investment of £85,000, that is an income of £3,867 a year. Guaranteed.

As a pensioner I could get a smidge more by giving my money to an insurance company and buying an annuity, but the capital is not so much at risk as guaranteed to disappear on the day I die. I don’t gamble, especially with an insurance company, about my death. It always wins.

Regulatory protection

Suppose I do not want to tie up my money for five years? Well, I can get 4.41% a year over two years, which is only £119  a year less than with the five-year deal. Capital not at risk.

I defy any adviser to guarantee a return of 4.8% over the next five years in investments — especially with capital not at risk

And, unlike the apartment pedlars, the businesses making these promises are Financial Conduct Authority regulated and covered by the Financial Services Compensation Scheme. So, should things go horribly wrong, my capital would still not be at risk, though the anticipated returns might come to an end a bit early.

A year ago, the best safe return over five years was 2.05%, and a year before that it was 1.55%. Anyone who committed to those would be feeling very sick today. But that was the era of nano-rates, when Barclays Bank paid 0.01% on its Everyday Saver account. Barclays’ UK profits in 2021 were £8.4bn; now we know why. Savers struggled to get even single figures on an instant access account.

I remind them inflation affects the value of investments just as much as it does cash

So where does this guaranteed, ‘capital not at risk’, long-term income from cash deposits leave traditional investments — apart from far behind?

Investors will say even 4.55% a year is much less than half the rate of inflation in November when the Consumer Prices Index showed a rise in prices of 10.7%. .

‘So,’ they smile, ‘capital not at risk? Of course it is. Inflation at that rate will mean your £85,000 will be worth less than £50,000 by 2028. I don’t call a £35,000 loss “capital not at risk”!’

I remind them inflation affects the value of investments just as much as it does cash. And, although the value of capital invested can rise ahead of inflation, it can also plummet.

A year ago, the best safe return over five years was 2.05%, and a year before that it was 1.55%

So, there is not an adviser on the planet (or at least not a regulated adviser in the UK) who will tell you how much your invested capital will be worth in five years’ time in nominal terms, never mind after inflation.

Flawed study

‘OK, but what about the Barclays Equity Gilt Study that shows investment in shares consistently outperforms cash in the long term?’ they say.

Sadly, that is a flawed study. First, it exaggerates the return on investment by taking no account of charges levied on investors in the real world. Second, it understates the return on cash by using the rate paid by just one building society account, which, since 1998, has been Nationwide’s InvestDirect account.

In 2021, when the research for the 2022 study was done, that account paid 0.01%. But in the middle of that year the best ‘no notice’ account paid 50 times as much and the best one-year account paid 90 times as much.

Of course, in the long term a balanced portfolio of investments will outperform cash.

I don’t gamble, especially with an insurance company, about my death. It always wins

But capital is at risk, there are no guarantees, and most people underestimate just how long ‘long term’ is. Some say as little as five years. But I defy any adviser to guarantee a return of 4.8% over the next five years in investments — especially with capital not at risk.

What to do with a spare £85,000? That is the cash conundrum.

Paul Lewis is a financial journalist, host of Radio 4’s Money Box and author of ‘Money Box – a money toolkit for life’

This article featured in the January 2023 edition of MM. If you would like to subscribe to the monthly magazine, please click here.