By Oliver Jones-Davies MA Chartered FCSI, Director (Client Investments), CCLA Investment Management
Inflation has been a silent thief in recent years. Consumer prices rose 5.4% in 2021, 10.5% in 2022 and 4.0% in 2023.[1] The Bank of England expects that consumer prices will rise another 2.75% over 2024.[2] Charities’ costs have risen with inflation, but incomes are only growing around 1% per year.[3] As a result, ever more charities are calling on their reserves.
From conversations with clients, we know that charities often keep those reserves ‘safe’ with their banks. But inflation has eroded the purchasing power of £100 placed in the average current account at the start of 2021 to just £86 by the start of 2024. Many savings accounts have scarcely performed better.
So what’s the most prudent way now for charities to safeguard their reserves?
More than half of UK charities hold at least £31 billion in cash, with no long-term investments. As a result, they miss out on around £1.5 billion of income per year.[4] Bonds, stocks and other investments can be good long-term stores of value. But they aren’t always suitable if your charity wants ready access to its reserves.
By contrast, so-called cash deposit funds[5] (a) aim to offer returns close to the Bank of England’s Official Bank Rate with (b) a high degree of security and (c) near-instant access.
(a) “Returns close to the bank of England’s official bank rate”: Cash deposit funds aim to provide returns close to the Bank of England’s main interest rate. To achieve that goal, they constantly scour the market, and place your money with a range of banks and building societies, at the best interest rates they can find.
Figure 1. Cash deposit funds aim to offer returns close to the Bank of England’s Official Bank Rate. That rate has risen from 0.1% to 5.25% in the past three years, and is currently 5%.
Source: Bank of England
(b) “A high degree of security”: Cash deposit funds invest with banks and building societies that they’ve assessed as financially stable, some of which might not accept charities as account holders.
(c) “Near-instant access”: You can usually withdraw your cash from a cash deposit fund in two working days.
In addition, many cash deposit funds monitor the banks and building societies on their approved lists based on sustainability indicators. That way, they aim to ensure that your money serves the interests of our communities just like you do.
The Bank of England expects that consumer prices will rise another 2.75% over 2024. But most UK cash deposit funds now offer returns of around 5%, although this will fall if the Bank reduces interest rates. This premium allows you to recover some of the inflationary losses you’ve suffered in recent years. Don’t settle for less.
[1] Office for National Statistics, August 2024
[2] Bank of England, 1 August 2024
[3] Pro Bono Economics, Office for Budget Responsibility, November 2023
[4] Broadstone, 1 July 2024
[5] Cash deposit funds, money market funds and liquidity funds are just some names for essentially the same vehicle.
