Rising Interest Rates and Excess Cash

At Chase de Vere, we pride ourselves on providing exceptional independent financial advice to clients who have suffered personal injury or are subject to the Court of Protection.

As of 13th June 2023, the Court Funds Office (CFO) has made the announcement that interest rates for their special and basic accounts will increase, following the upward adjustment of the Bank of England base rate on 11th May 2023. The Special Account will see an increase from 4.25% to 4.50%, while the Basic Account’s interest rate will rise from 3.188% to 3.375%.

This decision by the Lord Chancellor aims to sustain the operational costs of the CFO service, while simultaneously providing an enhanced rate of interest payable to clients. It’s an effort to make these accounts a more attractive prospect for storing excess funds.

Despite the rise, a key question remains: Is it now wise to let your clients’ excess monies, over and normal contingency requirements, idle in cash?

To put it simply, the answer is still – no. Despite the recent rate increases, the broader picture reveals that keeping surplus capital in cash accounts is unlikely to be the optimal strategy for wealth growth and preservation.

Why, you ask? There are several reasons.

1. Inflation Erosion: Rising interest rates often indicate an economy grappling with inflation. Despite the new, higher rates, inflation can erode the purchasing power of your clients’ cash savings, potentially outweighing the benefits of accumulated interest.

2. Opportunity Cost: Cash reserves do not participate in potentially higher-return investments. Although cash can provide a sense of security, the opportunity cost can be high. Equity markets, for example, have historically outperformed cash savings in the long run, and research shows that missing out on the 10 best days of returns even in long-term portfolios can have a lasting impact.

3. Economic Uncertainties: The increase in CFO rates reflects adjustments in the base rate set by the Bank of England, primarily influenced by macroeconomic indicators. These indicators are subject to change, implying that the rate could potentially decrease in the future.

The above reasons underline why retaining excess funds in cash, even amidst higher interest rates, may not be the most advantageous decision.
We believe that a balanced, diversified investment strategy still remains a prudent approach to managing excess cash. Proper allocation across various asset classes according to risk tolerance and financial goals can provide both growth and stability.

Every financial decision for Court of Protection clients should be evidenced as being aligned with your clients’ objectives, risk appetite, and time horizon. And of course, we’re here to help you navigate these considerations.

The depth of knowledge and experience demonstrated by Chase de Vere’s specialist advisers in supporting Litigators, Deputies, and Trustees is exceptional, and incorporates the following services:

  • Investment portfolio advice, documenting and advising on necessary risk
  • Reducing tax through utilisation of appropriate tax wrappers and allowances
  • Maximising state benefits
  • Budgeting and sustainability advice
  • Periodical payment calculations
  • Expert witness services
  • Personal Injury Trusts
  • Assistance with tax returns, Court of Protection returns and trust accounts

We look forward to continuing to provide the highest level of service to our clients and legal connections.

If you have any questions or would like to speak to us about how we can help you or your clients, please do not hesitate to get in touch.

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate tax advice, or trusts.

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