Financial advisers warn of "cash trap" as NS&I inflows hit £7.7bn in September
Following the Bank of England revealing that households’ net deposit flows into National Savings and Investment (NS&I) rose sharply to £7.7bn in September, the highest since August 2020, following net deposits of £0.3 billion in August, financial advisers have warned people against falling into a “cash trap”.
Wes Wilkes, CEO at Net-Worth NTWRK, said: “The flows to NS&I come as no surprise given the headline rates of 6.2% they were offering. For those short-term or fixed cash requirements, it was a great product and cash with NS&I is, of course, safe. However, I am concerned about investors sleepwalking into a 'cash trap'. I have heard of instances where investors are pulling out from long-term investments when down and moving to cash because they can get 5% fixed for a year. This is the trap, namely when do you 'get back in' and how do you beat inflation over the long term? I wonder in 18 months, if rates are back around 2%, how many people are left caught in the cash trap, having chased short-term rates with money that was really earmarked for the long term?”
Ross Lacey, chartered financial planner at Fairview Financial Management, also sounded a note of caution: “NS&I have been offering very competitive rates on cash savings recently so the inflows in September aren't surprising. What is concerning though, are stories of people selling out of their investment portfolios and pensions in favour of leaving it in cash products like this one.”
Meanwhile, Daniel Wiltshire, actuary and IFA at Wiltshire Wealth, urged long-term investors to beware the siren call of short-term rates: “Recent offers from NS&I to shelter savings from the economic storm are like a siren call to long-term investors. As seductive as these headline rates may seem, a sober analysis will show that below-inflation returns can wreck even the most prudent financial plan.”
Joshua Gerstler, chartered financial planner at The Orchard Practice, was left scratching his head at the demand for Premium Bonds: “I have never understood the obsession with Premium Bonds. If I told you we were going to put your money in a bank account, but rather than pay you interest every month, we'll pull the names out of a hat of the people we are going to pay this month, you would think I was mad. On top of that, there is no protection against inflation; someone who had £40,000 of Premium Bonds in 2010 has £40,000 of Premium Bonds today. There are better places to put your money.”
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