Inflation casts shadow on new £50 note

There has been much excitement about the Bank of England’s release of the new polymer £50 note, which enters general circulation from Wednesday. In monetary terms, I fear they could be as much use as a chocolate teapot.

Don’t get me wrong — I’ve always appreciated the rich, crimson hues of a crisp £50 note, especially if one happened to fall out of a Christmas card. But they are increasingly difficult to spend.

Even before coronavirus scared the nation’s pubs and shopkeepers into refusing cash payments, it was hard to drop a £50 unless staff could examine its veracity with a special pen or UV light machine.

The new designs featuring Alan Turing are a fitting tribute — the Enigma code cracker would have celebrated his 109th birthday on the day of the release, which also occurs within Pride Month. But I wonder what Turing would make of the following conundrum?

Even though cash use has plunged 35 per cent during the pandemic, there have never been more banknotes in circulation — amounting to about £80bn, according to the BoE. By value, all those lovely, yet somewhat unspendable, £50s make up nearly one quarter of this.

Why is this figure so high? The black economy, tax evasion and other forms of criminal activity are usually blamed. Regardless of any criminal intent, cash hoarding is a trend the pandemic has intensified (perhaps unintentionally, as it’s suddenly become so much harder to spend).

If you are the type of the person to stash cash under the mattress, the recent surge in inflation will be eating away at its value.

After being withdrawn during the second world war, the £50 note was reintroduced in 1981 (you might remember the design featuring St Paul’s Cathedral and Sir Christopher Wren).

Had you stashed one of these notes away 40 years ago, inflation would by now have destroyed more than three-quarters of its purchasing power (£38.46), says Sarah Coles, personal finance analyst at Hargreaves Lansdown.

Had you invested £50 back in 1981, she says, it could now be worth more like £2,300 (making some basic growth assumptions).

Even sticking one in a savings account would have been worthwhile — in the early 1980s, interest rates were 14 per cent.

Last week’s higher than expected uptick in inflation to 2.1 per cent means there are no savings accounts or longer-term savings bonds in the UK where your cash will not be going backwards.

How much cash should you hold?

Your age and risk appetite will help determine the answer, but the standard advice is several months worth of living expenses, or if you’re in pensions drawdown, between one and three years of retirement income. This will enable you to ride out any bumps in the market and avoid draining your pot too quickly.

When assessing how big your emergency fund needs to be, making the most rudimentary budget and trying to forecast your future spending needs will also help (factor in things like holidays, if we’re ever allowed them again, home improvements and future life events).

Don’t confuse holding cash for a rainy day with other forms of financial security. I’m happy to pay a monthly premium for critical illness insurance, as this would present the biggest upset to our family finances.

Holding too much cash might be considered irrational by investment experts, but it is also comforting. I probably hold more cash than I should, but when the pandemic first hit, this prevented me from selling down stocks at the bottom of the market (experts call this “passing the 3am test”).

Where are you holding it?

Rock bottom interest rates are a big problem for cash savers — and have been for some time.

However paltry today’s “best buy” rates might look, they beat the 0.01 per cent paid by most UK current accounts by a significant multiple.

According to Moneyfacts.co.uk, building societies and alternative banks offer the best “easy access” rates — but the best deals never last for long.

Yorkshire Building Society pays 0.65 per cent on its Loyalty Six Access Saver for existing members, but Principality, Leeds and Coventry building societies all offer between 0.23 and 0.25 per cent.

Atom, Charter Savings and ICICI banks all offer rates of around 0.5 per cent.

If you are prepared to lock up your money inside a savings bond for five years, the best rates on offer are about 1.5 per cent.

Premium Bonds are still one of the best options for higher rate taxpayers. The chances of winning a prize may have waned (now roughly equivalent to an interest rate of 1 per cent, with fears this could be cut further in future) but if you do win, the prizes are tax free.

I had a text last month saying I’d won £50 in the May draw, and felt for a moment like I’d won the lottery.

UK adults can hold up to £50,000 of bonds each, and they can be easily liquidated if you need the cash (providing the National Savings and Investments website is working properly).

They’re a useful short-term home for cash you know you’ll need in the future, whether that’s putting money aside to pay your tax bills — or in my case, the cash I need to extend the lease on my flat.

Other NS&I savings accounts have lower rates, but offer protection up to £2m (much higher than the standard £85,000 Financial Services Compensation Scheme rate) and have been used by friends who have sold one property but are yet to buy a new one.

Should you invest more of it?

Only if you’re happy tying up this money for 5-10 years. An emergency fund means you won’t need to become a “forced seller” if markets are down — but you should still be prepared for the emotional impact of a market crash.

Think through your long-term strategy before the dip comes, write down what you’ll do, and come back to it when you are tested.

Think too about the most tax advantageous routes of investing — such as paying more into a pension to take advantage of tax relief, or a stocks and shares Isa that will protect you from dividend tax, capital gains and income tax on your future withdrawals.

Even if you put money into a cash Isa (the best rates are currently 1.45 per cent on regular savings products) at least it’s inside a tax-free wrapper and could be transferred into an investment Isa at a later date.

However, be wary of the “cash park” facility within investment Isas, or selecting cash funds within your pension as you will usually pay some kind of fee on these “investments”.

Despite rock bottom rates, our emotional attachment to cash shows no sign of slipping. In turbulent times, its allure is even more powerful. Just make sure you figure out what your cash needs really are — and how best to achieve them.

Claer Barrett is the FT’s consumer editor: claer.barrett@ft.com; Twitter @Claerb; Instagram @Claerb