In investments, having too much money on deposit can also lead to problems with the pounds in the future - but in this case having too few rather than too many.
Those attractive interest rates may look more tempting than the lower rates offered by some other investments but what will they do in the future? A basket of goods priced at pounds 1 in 1948 would now cost nearly pounds 20, so investing for the long-term should involve looking out for capital, not just income.
Not that there is anything inherently wrong with having money on deposit. Emergency funds should be held on deposit and, if you switched money out of the equity markets into cash earlier this year, you would have beaten most investments over that time. Over the long-term, though, other investments should do better.
We asked five leading independent financial advisers for their views.
James Bruce, of Colchester-based Corporate & Personal Planning, says timescale is key to many investment decisions. If you have 20 years until you retire, you may have little need for income now, so your portfolio may consist largely of good-quality unit trusts investing in UK shares, perhaps split between tracker funds and actively managed funds.
If, however, you need access to your cash or will do so soon, your money is likely to be on deposit. Only when you can take at least a three- to- five-year view should you look for capital growth, Mr Bruce advises. Taking a short-term view, the Moneyfacts faxback service provides a list of current top rates.
Mark Dampier, of Churchill Investments, based just outside Bristol, says: "Base rates could fall to 5 per cent or below over the next 12 months. With the best deposit rates at around 6 per cent now, we can expect to see top rates fall to about 4.5 to 5 per cent in the near future. So investors should start to plan for this now and not wait until it happens."
If you need a yield of more than 9 per cent, Mr Dampier's tip is to look at split-income shares of investment trusts. These are likely to involve a capital loss on redemption but the Exeter High Income Unit Trust yields around 9.24 per cent, can be put into a PEP now or an ISA after 5 April, and has capital growth potential.
Slightly lower yields come from the M&G High Yield Corporate Bond, at 8.5 per cent, Aberdeen High Yield Bond at 9 per cent and Aberdeen Fixed Interest yielding 8 per cent. If you are looking for an income of between 5 and 8 per cent, Mr Dampier likes the look of corporate bonds, especially Credit Suisse Monthly Corporate Bond, yielding 6.7 per cent and CGU Monthly Income Plus at 7 per cent. With-profit bonds are also on the agenda, especially if withdrawals are kept to 5 per cent. Scottish Widows is one he fancies.
David Burren, of the Cheltenham-based Warwick Butchart Associates, says that the cautious investor could look at the Fleming Save & Prosper Extra Income fund, again ISA-able. This balanced fund invests 55 per cent in mainly blue-chip shares, 40 per cent in government and corporate bonds and 5 per cent in cash. It at present yields 4.7 per cent.
What about guaranteed income bonds, now offered by a number of insurance companies; can they offer an alternative to equity-based investments? Up to a point they can, says Danby Bloch, of the London adviser Raymond Godfrey and Partners. There are two types of such bonds. The first simply pays out a fixed income, from one to up to five years, and repays your capital at the end of the term. Returns are not very exciting but, if interest rates do fall, as many now expect, they could look attractive.
The second type is more complex but offers a much higher return. Scottish Life pays an "income" of 9 per cent a year for five and a half years. The downside is that your capital is only returned if the average of the FTSE and Swiss stock markets rises by, on average, 5.85 per cent a year.
Mr Bloch says he is not comfortable with such plans, preferring an open- ended investment and more flexibility. The bonds are popular though with many people but you are gambling on what stock markets will do over the next few years.
Amanda Davidson, of the London financial advisers Holden Meehan, suggests another option for the investor looking for income. If you have used up your PEP and Tessa allowances, or you are unable to invest in the next few days, you could consider an offshore investment bond.
"There is nothing illegal about offshore bonds, they are just another financial investment," she says.Many offshore insurers are subsidiaries of well-known UK firms.
The higher-rate taxpayer gets the advantage of a tax-free roll-up and can take out 5 per cent of their investment every year for 20 years with no immediate tax liability. The trick is to encash such bonds in a tax year when your income is very low as you must pay tax on all gains at your then highest tax rate.
Charges are comparable with mainland insurers at 5 to 6 per cent for the bid/offer spread and an annual management charge of 1 to 1.5 per cent. Offshore bonds are at the exotic end of financial services and do require expert advice both before investing and during the bond's life. The key with all such investment choices is to ensure that you look carefully at both the investment itself and at your own income needs both now and in the future.
Churchill Investments: 01934 844 444; Corporate & Personal Planning: 01206 853888; Holden Meehan: 0171-404 6442; Raymond Godfrey & Partners: 0171-250 0967; Warwick Butchart & Associates: 01242 584 144.
n `The Independent' has produced a free last-minute Guide to PEPs. The 28-page guide by personal finance editor Nic Cicutti also explains the new Individual Savings Account. The guide is sponsored by Scottish Widows Fund Management. For your free copy call 0345 678910.Reuse content