Brought into existence in 1988 by Finance Act changes permitting unit trusts to invest directly in deposits and other near-cash instruments, cash unit trusts offer a number of attractions to financial planners and their clients.
Their first and most obvious advantage is the competitive interest rate they can offer. Cash trusts invest in the interbank money markets and are therefore able to benefit from wholesale interest rates for large deposits – rates which would be beyond the reach of individual investors.
A glance at the cash unit trust sector shows an average interest rate at the time of writing of 3.45 per cent net, compared to 3.15 per cent net for the five largest building societies' average rate on deposits of up to u10,000. And while direct comparison with instant access accounts is valid because legislation requires that cash trusts pay investors within three days, cash trusts can also compare favourably with notice and other higher-rate accounts.
This is because cash trusts are continually managed to secure competitive rates over the longer term – unlike some bank and building society accounts which provide an attractive headline rate to attract new investors which then languishes as the marketing men turn their attention to the next special deal which, conveniently, is not notified to depositors.
The professional management of a cash unit trust also has important implications for security, as the manager seeks to provide a prudent spread of investments and closely monitors the credit worthiness of institutions with whom the trust's cash is deposited. In recognition of this, a number of cash trusts have actually achieved higher ratings from independent credit rating agencies than any individual UK bank or building society.
As well as offering a competitive yield and high levels of security, cash unit trusts can also prove extremely cost-effective, without the usual initial charge associated with other types of unit trust. However, caution is required because not all cash trusts have this cost effective structure.
All these factors clearly make cash unit trusts very attractive as a flexible short-term haven for money – perhaps during probate procedures or during any period when a client's
financial affairs are being reorganised.
Furthermore, if you are involved in broader financial planning, many of your clients could benefit from more permanent use of a cash fund as an alternative or supplement to bank and building society accounts. A small number of cash trusts now offer a whole range of banking facilities, which includes paying-in books, chequebooks, direct debit payment facilities and – for the first time this year – an ATM Cashpoint card.
So cash unit trusts can be a reliable temporary holding place for client cash, or a competitive alternative to a bank or building society account to offer your financial planning clients – take a look at cash unit trusts.
Alan Mearns is a director of Fidelity Investments.