Should I Invest in Cash with Stock Market Highs, Geopolitical Risks and Inflation?

We have all seen in recent years, high inflation then higher interest rates and now stock market records being set almost daily.  You will have also head Warren Buffett’s famous phrase: “be fearful when others are greedy and to be greedy only when others are fearful.”

2024/25 Returns

Last year (2024), after decent average stock market return of c.15%, we suggested to many clients that it was time to lock in profits and move those profits to cash.  Bank of England interest rates were 5.25% pa.  Meaning Cash ISA rates of c.5.75% pa and headline cash savings rates of c6.00% pa.  Even in pension funds, after charges, net average returns on cash deposit funds were c4.50%-5.00% pa.

Opportunity Funds

Last year, we suggested that inflation and then interest rates would start to fall slowly but with geo-political risk, it was a balanced approach to lock in profits and return to a similar equity/stock market holding as you were in the previous 12 months.  If markets climbed, you would benefit from those rises but also get a reasonable return on cash holdings.  If stock markets corrected (-10%) or crashed (-20%), you would then have cash holdings that had not suffered falls and would be available as ‘opportunity’ money to buy back in after any correction/crash.

Outlook for 2025/26

• Stock market volatility on geo-political risks and the fact that markets have set new highs have set our own ‘Warren Buffett’ alarm bells off.
• UK CPI inflation in August 2025 was 3.8% pa and the old measure, RPI was at 4.6% pa.  CPI has been forecast to increase to 4.0% pa before the end of the year before falling back.
• Bank of England base interest rates are currently at 4.0% pa.  Meaning headline interest rates on cash savings as follows:

Cash ISAs Rates

• Easy access 4.51% pa, tax free.
• Notice account 4.51% pa tax free.
• 1 year fixed rate 4.27% pa tax free.

Cash Savings/Deposit Accounts Rates

• Easy access 4.80% pa gross, less income tax at your highest rate. 
• Meaning net returns for Basic Rate Taxpayer at 3.84%, Higher Rate Taxpayer at 2.88% and, Additional Rate Taxpayer at 2.64%.
• Notice account 4.80% pa gross, less income tax at your highest rate.
• Meaning net returns for Basic Rate Taxpayer at 3.84%, Higher Rate Taxpayer at 2.88% and, Additional Rate Taxpayer at 2.64%.
• 1-year fixed rate 4.52% pa gross, less income tax at your highest rate.
• Meaning net returns for Basic Rate Taxpayer at 3.62%, Higher Rate Taxpayer at 2.71% and, Additional Rate Taxpayer at 2.49%.

• 2, 3, 4 and 5 year fixed rate deposit accounts attract even lower interest rates.

Rates Source: Moneyfacts.co.uk

Once you exceed your interest earned level via the Personal Savings Allowance (below), net returns of 3.84%, 2.88% and 2.64%, are at or below inflation at 3.8% (rising to 4.0%) meaning your cash is devalued.

Personal Savings Allowance

After ISA allowances are used up, the Personal Savings Allowance is the maximum interest you can earn each year income tax free.

• Basic Rate Taxpayer £1,000 pa.  Meaning at a 4.80% gross return, the maximum you should have in combined cash deposits is £20,833 to earn tax free interest of £1,000 pa.
• Higher Rate Taxpayer £500 pa.  Meaning at a 4.80% gross return, the maximum you should have in combined cash deposits is £10,416 to earn tax free interest of £1,000 pa.
• Additional Rate Taxpayer £0 pa.  Meaning all cash deposit interest is taxable, after ISA allowances, and lower than inflation, meaning cash is devalued.

Gilt, Bond, and Fixed Interest funds

In conclusion, and given stock markets are volatile, inflation likely to rise then fall and interest rates falling, you may wish to consider moving profits into Money Market, Gilt, Bond and Fixed Interest funds (not cash deposits) via your pensions, Stock ISAs or General Investment Accounts, as bond/gilt yields (interest/coupons rates paid are high at present, so a good time to buy), and capital values will also rise when interest rates do fall.

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