“The difference between a little money and no money at all is enormous.” (Thornton Wilder).
The cash landscape
All UK charities are likely to have a current account and perhaps a deposit or savings account where they try to make the most of their cash. Some charities will willingly lock-up some of their cash to get a higher interest rate. For others, this may not be attractive or practical.
A recent survey of the top 5,000 charities reported that combined they have around £17bn of cash. Many charities hold their cash where they bank and the majority of the cash is deposited with the traditional high street banks. What a charity does with its cash is important as another survey, from 2016, estimated that a staggering 98 per cent of UK households use the services of at least one charity.
Charities can spend a great deal of time and energy conducting investment reviews to ensure they hire the best investment manager for their needs. Typically these focus on longer term investments – such as equities, bonds, property etc. Given that these investments can be the majority of their assets, the focus is natural. However, how many charities have researched the interest rate they receive on their cash in the last couple of years and the alternatives available?
It is easy to understand why cash can be forgotten. Interest rates have been at very low levels for a long time and the Bank of England base rate was maintained at its existing level at the Monetary Policy Committee Meeting in June 2019. It is difficult to get excited when the first meaningful digit of the interest rate comes after the decimal point!
Getting better cash returns – what are the alternatives?
So what level of returns do banks provide on instant access or similar accounts? It can vary a great deal. The most popular bank with charities pays between 0.2 per cent and 0.4 per cent AER, depending on the amount invested. The 0.4 per cent is only available to those charities that have at least £1m of cash to deposit! A leading charity bank pays just 0.15 per cent AER on its instant access account.
What are the alternatives? The first is to shop around to find the best interest rate. There are a lot of different options and rates out there.
The second is to consider if you can afford to lock-up your cash, where you can expect to get a higher interest rate as a result. For example, a 60-day notice account from a leading charity bank, will pay 0.90 per cent AER – significantly higher than their instant access account.
Pooling your cash with other charities is another option, which can offer a higher interest rate than an individual charity might get for a similar type of account from their bank. There are a couple of deposit funds available that use this combined purchasing power and provide same day access to your money (paying an interest rate of between 0.64 per cent and 0.70 per cent AER at present).
Given the overall low interest rate environment, the difference in monetary terms between the best deal and a charity’s existing arrangements may not seem enormous. But if a better interest rate delivers even a little extra cash to spend on service users, it might be enough to make an enormous difference to them.
Mark O’Connor is head of business development at Epworth Investment Management, which offers the Affirmative Deposit Fund for Charities, which pools the cash deposits of a large number of charities (over £460m as at 31/3/19) and currently pays 0.70 per cent AER on all balances.
Epworth Investment Management Limited (Epworth) is authorised and regulated by the Financial Conduct Authority. Incorporated in England and Wales. Registered number 3052894. Registered office 9 Bonhill Street, London EC2A 4PE.
This content has been supplied by a commercial partner. Epworth sponsored the children and youth category at this year's Charity Awards.