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Where to Stash £1,000,000 25th January 2012

Question

question
This question was asked on a Citywire forum a few days ago and whilst there have been 49 responses to this question at the time of writing, there was some questionable advice given. This made me think about how I would answer such a question, so here are my comments.

Risk Propensity

The writer of the question describes themselves as 'recently redundant and retired' and so from this I would deduce that they are probably in their sixties and the £1m in question sounds like it is their entire life savings. Therefore they do not have the capacity to lose their capital and so preservation of capital will be the primary aim.

They have identified the risk associated with putting all their cash in one bank and so default risk also needs to be addressed.

Liquidity Requirements

The writer mentions the need to generate an income to pay for rent and other outgoings and also a possible need to withdraw money at 3 months notice to buy a house. This means that liquidity is very important and the maximum time horizon is three months.

Suitable Asset Types

Given the need for capital preservation and the requirement for liquidity the only suitable asset types are cash deposits and National Savings (NS&I). NS&I are backed by the UK Government and are considered to be as close to risk free as you can get. NS&I have seen an influx of deposits recently due to a flight to quality. Their Direct Saver account, for example, pays 1.5% gross annual equivalent rate (AER) and is taxable. The writer is expecting a return of 3% or more, so putting the whole £1m into National Savings will not meet their income expectations and therefore cash deposits with banks and building societies will need to be included to get near to the target return.

Managing Default Risk

The Financial Services Compensation Scheme (FSCS) covers 100% of bank and building society deposits up to a maximum of £85,000 per person per authorised firm. This means that joint investors are covered for £85,000 each and the amount held in a joint account will usually be split 50/50 between the two account holders. It is important to note that the limit applies at the authorised firm level. In some financial services groups there is only one authorisation across the group. For example, Bank of Scotland, BM Savings, Halifax, AA Savings, Saga and St James Place Bank all come under the same authorisation of Bank of Scotland plc. You can check this on the FSA website as firms with the same authorisation have the same FSA registration number. There is a table on the FSA website giving details.

Non UK banks are not covered by the FSCS as they are covered by an equivalent European scheme which covers deposits up to €100,000, which is approximately £83,500. This includes banks such as ING Direct, so check that you know which compensation scheme you are covered by before investing.

The existence of compensation schemes mean that retail investors can make sure that their savings are protected by these schemes by placing deposits up to this limit. Therefore £1m in a single name would require the opening of 12 accounts to ensure your savings are fully protected. If you have joint accounts then only 6 accounts are needed.

Rates of Return

The good news is that whilst the Bank of England base rate has been at just 0.5% since March 2009, rates offered by banks to retail investors have remained high in relative terms. For terms less than 3 months, the best rates are usually variable 'bonus rates' which apply for an initial period to new investors. At the end of the bonus period, rates fall to the 'standard rate', which is typically around 0.5%. Often immediate access rates can be higher than notice accounts because of bonuses. If you do choose an account with a bonus rate, diarise the date the bonus expires so that you can move your money before then. Some banks allow you to give your account a name, so if the bonus expires on 25th January 2013, call the account 25Jan2013.

The table below shows some currently available products and rates:

Provider NameProductNotice PeriodGross AERBonus PeriodRate after bonusCompensation Scheme
Shawbrook Bank 95 Day Notice Personal Savings Account Issue 1 95 Day 3.35% none 3.35% FSCS
BM Savings (Bank of Scotland plc) note 1 BM Online Extra (Issue 1) none 3.20% 12 months 0.50% FSCS
West Brom Direct Bonus account 3 none, max 4 withdrawals 3.13% 28/02/2013 1.75% FSCS
Nationwide MySave Online Plus Issue 4 none, max 1 withdrawal 3.12% 12 months 1.51% FSCS
Aldermore note 2 90 Day Notice 90 Day 3.10% none 3.10% FSCS
krbs (One Savings Bank plc) Internet 60 Day Notice 60 day 3.10% 12 months 2.10% FSCS
Santander UK e saver none 3.10% 12 months 0.50% FSCS
Skipton BS Online Bonus Saver none 3.05% 12 months 1.50% FSCS
Post Office (Bank of Ireland UK) Online Saver (Issue 4) none 3.01% 12 months 1.65% FSCS
Leeds BS note 3 Postal Bonus Saver Issue 2 none 3.01% 31/01/2013 1.50% FSCS
ING Direct N.V. Savings Account none 2.90% 12 months 0.50% Dutch central bank €100,000 (£83,581)
Virgin Money (Northern Rock plc) Easy Access E-Saver none 2.85% none 2.85% FSCS
Mansfield BS note 4 Postal Premium 4 (4th Issue) none, max 4 withdrawals 2.85% 12 months 2.00%FSCS
Principality BS note 5 e-SAVER Issue 4 none 2.85% 12 months 1.65% FSCS

Notes:
Rates are correct as at 25th January
1 Annual interest, calculated daily. Minimum 50,000 investment. BM Savings is within Bank of Scotland plc for FSCS coverage
2 AER guaranteed to be 2.00% above Bank Base Rate Until 01/03/2013
3 Annual interest, calculated daily
4 Annual interest, calculated daily and paid on 30th June
5 Annual interest, calculated daily and paid on 1st January each year

The highest rate is for a 95 day notice account, which is 5 days longer than the 3 month maximum but this may be acceptable as the average duration is 21 days. In this case the average rate is 3.08% over 12 accounts. If this account is not used the average rate falls slightly to 3.04% and the average duration reduces to 13 days.

Some of the accounts only pay interest annually but it is still calculated daily so it should have minimal impact. The advantage of monthly interest is that this can often be paid to your bank account and so you do not need to make a withdrawal each month to take an income.

Two of the accounts have limits on the numbers of withdrawals so it is best to leave the cash in these accounts until it is needed to buy the property and then close the account down. Ideally income should be taken from the lowest paying accounts first to boost the average rate earned.

Conclusion

It is possible to find a solution that meets all the requirements but it does require opening 12 different accounts, which could be 11 accounts with £83,500 and one account with £81,500. It will be time consuming to do this, but the alternative is to use a cash specialist to do this for you and they will charge a fee for arranging accounts for you.

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