Is Cash King?

I stopped investing back in 2002 after some bad experiences and have remained in cash deposits ever since. I hold quite a large amount in sterling, which I do not have any short-term needs for. I have a one-year fixed deposit which pays 3.9% and a one-month deposit that pays 3.4%. Both accounts are in the Isle of Man, which means that the interest will be further reduced in July when the EU Savings Tax Directive comes into force. What better home is there for approximately £50,000?

The rates you are receiving are average but certainly not the best. You must bear in mind that the Bank of England base rate is currently 4.75%. You should therefore be looking to close that figure for a medium term deposit. The one-month LIBOR is 4.83% and the 12-month LIBOR, 5.03%. UK interest rates are therefore expected to edge up slightly (if anything) in the next year.

I have researched the best offshore rates available and for a one-year fixed deposit you can get 5.1%-5.2% (depending on the amount invested) in sterling. The deposit allows for no withdrawals over the period but interest can be paid monthly, if required.

For shorter term deposits the best rates are slightly lower but still above the base rate of 4.75%. Interestingly, you can obtain 4.85% on a seven-day notice account. From these figures you can see that you are losing out by approximately £650 of interest per annum.

It is advisable to therefore 'shop around' as opposed to remaining with the one bank. Competition is strong and good rates can be obtained during special offer periods. Having said that, certain banks are regularly in the 'Top Three' for interest rates year after year.

Tables of the best rates available are produced in most international investment publications. Research can also be done on the Internet.

As regards the EU savings tax, I have been advised that some of the leading international banks are shortly going to be writing out to customers to brief them on the tax implications on their offshore accounts.

If the directive comes into force in July, then you are correct that the interest received will be reduced by the withholding tax, starting at 15% if you elect for that option. Professional advice should be sought on this matter well before July so that your finances are in order and that you take the most appropriate action.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com.

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.