Cash rates beat inflation by most since 2008 - how to play it

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The rates available on cash accounts aren’t the same as the Bank of England Rate, but they are related. At the time of writing, the best cash rates (easy access, non-ISA) sit around 5.2%.

How should investors approach this new era of inflation-beating cash?

Cash & investments - getting the balance right

You want both your cash and investments to earn the most possible but it’s important to recognise that each plays an important - and different - role - in your financial mix.

Cash will not lose value in nominal terms (although it can lose value to inflation) whereas investments can fall in value. The compensation for that investment risk is the potential that investments can produce a higher return - with the chance, of course, that they don’t.

• Read more about managing risk

If you need the potentially higher returns available from investments to make your financial plans work in the long term, loading up on cash, even if rates are beating inflation, may mean you fall short of hitting your goals.

Consider those living from investments in retirement. Many will base their income on withdrawals worth 4% of their fund each year and raise those withdrawals in line with inflation. Were their fund held entirely in cash - even at today’s inflation busting rates - it is unlikely they would get the income they need.

The chart below shows the very long-term performance of cash versus investments, in the form of shares and bonds. Cash (represented here with short-dated bond returns) has produced a steadier ride - and no losses along the way - but ultimately a lower return.

That doesn’t mean better rates for cash aren’t very welcome for investors. Every investor may likely be a cash saver as well.

It makes sense to hold a sum of cash that you can dip into in an emergency - an amount worth three to six months of income is sometimes recommended. This actually helps your investing because it means you won’t have to sell investments to produce cash in a pinch.

Beyond that, it can also make sense to hold cash on the sidelines that you are willing to use to take advantage of investment buying opportunities as they arise.

If you think upping your cash exposure is the right thing to do, consider the best way to do it. Unless held in an ISA, any cash return above the Personal Savings Allowance will be taxed as income. The Personal Savings Allowance is set at £1,000 for basic rate taxpayers, £500 for higher-rate taxpayers and zero for additional rate taxpayers.

• Learn more about the Fidelity Stocks and Shares ISA

If you think you’ll want to move money quickly between cash and investments, it can make sense to hold cash via you investing account. Cash fund or money market funds produce a cash-like return. The Fidelity Cash fund is the best-selling cash fund on the Fidelity Investing platform and produced 5.16% of income in the past year - or 4.81% after deducting the Fidelity platform charge of 0.35%.

You can also earn interest on money held in your investment account even if you don’t invest it into a cash fund. Fidelity offers interest on cash and you can learn more about how we manage your cash here.

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