How much cash is too much?

Linton

Evidence of too much cash is not having sufficient money invested to meet future needs.  Too little cash can cause difficulty/hassle in raising the money you need particularly for large one-off expenses.  Hopefully there is a happy medium when you have sufficient cash to buy whatever you want to buy when you want to buy it, and also have secure financing for your long term needs.

EthicsGradient

Since your wife's income is about to be only 5k/year, that means she'll be able have about £13.5k interest at 0% tax - from perhaps 300k. You don't say how much, if any, of your current combined cash is in cash ISAs, and how much is taxable. But it's worth looking at putting up to 300k in her name, rather than yours or joint, if you have that outside ISAs. That's better than premium bonds. If you want more cash than that, then savings accounts for her paying basic rate tax still give you more than premium bonds do, though for yourself, it sounds like you're right on the line of paying higher rate tax (maybe putting the basic £2,880/yr into a SIPP keeps you from that). So it may well be best to have all the non-sheltered cash in your wife's name, until you've invested a fair amount of it.

It sounds like you'd be comfortable with more in multi-asset funds, and that seems a sensible option. Feed the 40k/year into S&S ISAs with such funds each time you can, and yes, if you don't mind a little extra paper work if you have to calculate capital gains later, drip feed into a general account. 

Say you decided to keep 3 years spending money in cash - about £180k. That would be £360k to invest. There are 19 months to April 2027 - that would be 2 tax years ISA contributions (80k), and 19 months into the general accounts - about 14.7k/month.

If you do have cash inside ISAs, you could look at transferring that to S&S ISAs - to get the tax benefits on it earlier, in particular not building up any capital gains liability.

vacheron

Thanks for the extra info. 

Firstly (while I remember) I am hoping this £540K is not all stored in a single financial institution (unless it is something with a higher protection limit than the FSCS, such as NS&I)? 

Thinking of things not mentioned above:

Small holiday home abroad?  

You could also place some money into a pension for those who you plan to leave an inheritance for as it seems unlikely that you will require all of the money in your lifetimes. This will provide immediate tax relief of 20% (or possibly 40%) for the recipient, if this was done soon it would minimise the risk of falling foul of the 7 year rule, and it will be able to grow for potentially decades until they require it.

kimwp

If you are planning on leaving an inheritance and happy you won't need that money, it's better to pass it on sooner than later- cash injections (used wisely) have a much greater impact the earlier they are in life - for example, buying earlier avoids years spent paying rent to a landlord, early investment in pension has a huge impact on the end pension.

InvesterJones

rothers said:

poseidon1 said:

Low risk tax free gains on direct investment into low coupon UK government gilts.

I have no idea what you've just said there 

If you're familiar with bonds, then gilts are just bonds issued by the UK Treasury. They have the quirk that any capital gain is not taxed, so if you buy low coupon (low interest rate) bonds at a price lower than their redemption value then you can hold them outside of a tax wrapper and only pay income tax on the (low) interest, and when they mature (or you sell) you don't pay tax on the increase in value while you've held them.

It's possible purchase a range of individual gilts of different maturities in this way so that in the future you have a rolling stock of maturing gilts, allowing you to harvest capital gains, while also being able to access all the money relatively quickly if needed.

vacheron

Stocard said:

I don’t get why so many people hang on to half a million in cash. 

I used to think having a huge buffer would make me sleep better but after a while it just felt like watching money slowly rot away with inflation. 

At one point I had about 200k in cash and every time I checked the interest rates I’d feel annoyed because it was obvious the banks were making more out of me than I was making out of them.

For me the turning point was when I needed to replace the car and pay for some home repairs all in the same year. 

I realised I didn’t need anywhere near that much sitting in a current account. Since then I’ve kept roughly two years of expenses in easy access and the rest goes into global equity trackers. I still get that feeling of security but the money actually works instead of just sitting there.

I know some people will say keep five or ten years in cash to protect yourself but I think that’s too cautious if you already have guaranteed income streams like pensions. 

At the end of the day it depends how much risk you can stomach, but I honestly think people massively overestimate how much cash they really need once the mortgage is gone and the pensions are paying out.

What I’d be more interested in is how you feel about watching the value of your cash pot shrink in real terms every year. Does that bother you or do you see it as the price of peace of mind?

I appreciate that we don't know how the OP came to have £500k+ of cash, or for how long. It may have been a recent inheritance, given their respective ages. But I agree with your experiences.

I was trying to get my parents (both in their mid 70's, home fully paid off) to lock away some money in a 1-year bond to maximise their interest, but my mum was adamant that she wanted to keep around £40K in an instant access account "for emergencies". 

I asked what "emergencies" she could possibly envisage where she would need £40K in a hurry, and in the end I promised that I would underwrite any instant cash that she required in exchange for her limiting her emergency fund to "just" £5K. 

So here we are about 1 year later and she has made an additional £1,850 by locking the extra £35K away, The £5k emergency fund remains completely untouched, and even car servicing, a new bathroom, and other incidentals have been funded comfortably from their 2x state pensions and 2x final salary pension income! 

HHarry

Stocard said:

I don’t get why so many people hang on to half a million in cash. 

 I guess how you invest may answer that question.  I hold £250k cash, which is about 30% of my pot.  But the rest is invested in 100% equities.  Overall that’s not far off a VLS60 or GS Balanced - which are often cited as sensible funds to hold to reduce volatility.

 

Linton

Holding a significant amount in cash can be highly beneficial.  For example I was recently able to get a late booking for a winter cruise (small ship!) at half price.  The time taken to sell investments and transfer the money to a current account would have led to the loss of the opportunity.  Major cash holdings also mean that you can be far more flexible with your expenditure without worrying about selling at a bad time.

Mark_d

rothers said:

Circs are that I have an index linked pension after tax of around £42k, my wife retires next month and she will have an index linked pension of around £5k. Our total income is around £3,900 per month after tax. We currently allow ourselves £5k per month to pay for all bills (mortgage is paid off), spending money, holidays and everything else.

Between us we have around £225k in stocks and shares SIPPs and ISAs and around £540k in cash.

I am aware that we hold far too much cash but how much do you think we should actually hold bearing in mind that I am 53 (retired) and my wife will be 55 next month when she retires?

I am comfortable with fairly high risk investment due to the relatively low extra amount I need each month to cover our spends. I only invest in low cost multi asset funds due to a lack on knowledge on the subject.

Any advice?

Cheers

I would suggest putting £50k each in to Premium Bonds and then the rest of your wealth can be invested.

I would start my maxxing pension contributions if you can.  Then putting money into S&S ISAs.  The remaining non-cash element can go in to a regular share dealing account.

The regular share dealing account should probably be in your wife's name as she'd pay less tax on the income.

Stargunner

Linton said:

Holding a significant amount in cash can be highly beneficial.  For example I was recently able to get a late booking for a winter cruise (small ship!) at half price.  The time taken to sell investments and transfer the money to a current account would have led to the loss of the opportunity.  Major cash holdings also mean that you can be far more flexible with your expenditure without worrying about selling at a bad time.

I prefer to pay for holidays with a credit card due to the added protection that they provide.