UK short-term interest rates have been on a rollercoaster ride in the past five years. The Bank of England base rate started the decade at 0.75% and three months later as the Covid-19 pandemic took hold, fell to a mere 0.1%, the lowest-ever level. Then from December 2021 a steep climb began which ended at 5.25% in August 2023.

A year later rates started a gentle descent, with a final cut for 2025 (to 3.75%) expected to be announced on 18 December.

If you are holding cash on deposit, the steady decline in interest rates is not good news. Current deposit rates roughly match inflation, but that is before any tax is considered, so after tax your buying power is shrinking. If you are a UK higher-rate taxpayer your personal savings allowance takes only £500 of interest out of tax (£1,000 if you are a basic-rate taxpayer, but nothing if you are one of the 1.23 million additional-rate taxpayers).

There are good reasons for holding cash – we all need some instant funds to cover unexpected costs. However, how much you hold and how you hold it both need to be reviewed regularly. Accumulate too much cash and you could be missing an opportunity to invest for the longer term. Choose the wrong cash home and what was once an attractive interest rate might have evaporated over time.

For advice on the level of cash reserve you should be holding and where it should be, please talk to us.

✣ The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.