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Had a windfall? How to keep it safe…and earn the best returns

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It’s a nice problem to have, but where should savers with large pots of cash put their money?

It’s not as simple as it looks. The Financial Services Compensation Scheme (FSCS) only covers sums up to £85,000. At the same time, while interest rates are low on large sums the odd 0.5% can make a difference.

Savers with a large chunk of cash that they cannot afford to lose (from, say, an inheritance) face a dilemma – go through the rigmarole of splitting it into FSCS-sized chunks or leave some of their money unprotected?

Anna Bowes, co-founder of Savings Champion, said NS&I can be really useful because the full amount deposited with it is protected by the government.

However, if this isn’t an option, an alternative approach could be to search for a provider that has more financial strength. You may be able to tell this through rating agencies, such as Moody’s and Fitch, which provide guidance on the financial strength of companies. Of the 52 providers which have both a Moody’s and Fitch rating, only 29 have a rating of A or above with Moody’s and just 25 with Fitch.

The good news is that all of the top six high street banks get at least an A rating from Moody’s. The bad news is that they often offer the worst rates. Bowes gives the example of a £500,000 deposit into an easy access savings account with HSBC, which would earn just 0.05% or £250 in gross interest over 12 months (the rate is 0.10% for HSBC Advance customers).

In contrast, the same deposit with the Yorkshire Building Society, which is rated A3 with Moody’s and A- with Fitch, could earn 1.11% or £5,550.

For fixed rate bonds, the differential is even wider. The Bank of Scotland is offering just 0.40% for a 12-month fixed rate bond, whereas Close Brothers (rated Aa3 by Moody’s and A by Fitch) is offering 1.75% gross. That’s a difference of earning £2,000 or £8,750 gross per annum. For those with smaller balances, Investec is paying 1.90% for one year on balances of up to £250,000.

Bowes’ research shows that savers can earn more if they are happy to split their funds and open multiple accounts – the highest paying accounts will often have maximum investment limits. The current six best one-year fixed rate bonds earn a blended rate of 1.86% – or £9,318 in gross interest – an extra £568 over the year.

A final consideration is that if investors have a longer-term horizon, keeping all their money in cash may not be the best option unless it is for a specific purpose, such as a house purchase. Even the top-paying cash savings accounts do not beat inflation and savers risk losing money in real terms. Putting part of your capital into the stock market may be a better option for those with five or more years to invest.

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