UK Expat Planning on returning to UK in short / medium term

For residents of the United Arab Emirates.
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Small-Fry
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Joined: Fri Dec 04, 2020 6:48 am

UK Expat Planning on returning to UK in short / medium term

Post by Small-Fry »

I am currently based in the UAE. Due mostly to a recent inheritance I currently have roughly £165K GBP in cash accounts in the UK, alongside 240K AED in cash accounts in the UAE and $28k USD in a vanguard S&P500 tracker. I own a flat in the UK worth around £300k GBP

I am planning on returning to the UK in the next year or so, upon which time we plan to live in the flat for a short while before moving to a larger place so will need all this cash (- emergency expenses) to fund that move.

My instinct is to keep everything in cash, however I am currently opening new savings accounts (again) as rates keep being cut and cut. Is there a very low risk investment that may give a more meaningful return than cash and perhaps won't require me to keep switching every few months? Would a UK government bond fund / etf work well over this timescale ?

I have seen the "Vanguard U.K. Government Bond Index Fund" but am not sure I understand the information provided as it looks too high return to be low risk.
Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: UK Expat Planning on returning to UK in short / medium term

Post by Valuethinker »

Small-Fry wrote: Fri Dec 04, 2020 7:19 am I am currently based in the UAE. Due mostly to a recent inheritance I currently have roughly £165K GBP in cash accounts in the UK, alongside 240K AED in cash accounts in the UAE and $28k USD in a vanguard S&P500 tracker. I own a flat in the UK worth around £300k GBP

I am planning on returning to the UK in the next year or so, upon which time we plan to live in the flat for a short while before moving to a larger place so will need all this cash (- emergency expenses) to fund that move.

My instinct is to keep everything in cash, however I am currently opening new savings accounts (again) as rates keep being cut and cut. Is there a very low risk investment that may give a more meaningful return than cash and perhaps won't require me to keep switching every few months? Would a UK government bond fund / etf work well over this timescale ?

I have seen the "Vanguard U.K. Government Bond Index Fund" but am not sure I understand the information provided as it looks too high return to be low risk.
So the reason that fund has done well is interest rates have come down. In response to the Covid-19 crisis, the Bank of England has yanked down interest rates. The market was surprised by this, and the price of bonds moves up when interest rates come down (that's a mathematical relationship).

Interest rates would have to fall even *further* to repeat the trick, and since they are at the lowest they have ever been in recorded history (since 1696 at least and maybe 1300) for this long, that's probably less likely.

Since lenders (banks and building societies) cannot charge high interest rates on their loans, in turn they are notching down what they give depositors.

You have an £85k deposit insurance limit in the UK. Now if you have £165k with any of the big High Street clearing banks (Lloyds, Barclays, HSBC, Natwest/ RBS) you have to view it as safe - during the Global Financial Crisis of 2008/9, the government bailed out RBS & Lloyds.

If you have it with smaller financial institutions, there is the theoretical possibility of loss. I don't really think the Nationwide Building Society is going to go broke, and AFAIK no depositor in recent history has ever lost money on an *insured* account. But I remember Bank of Credit and Commerce International (BCCI) which was a heavy banker to Asian-owned businesses in the UK, and went bust, and it took depositors years to get their money back, and some big depositors didn't get 100% back. And the Icelandic banks were paying great deposit rates before the crash, 8% when you could only get 5% at a high street bank, and then when they crashed, people discovered their deposits were not (fully) insured.

So prudence says if a smaller institution, make sure it is insured, and stick to £85k per institution per person (you and your spouse, together, would have £170k insured with Barclays, say). That limit is for all accounts, btw, not per account.
My instinct is to keep everything in cash, however I am currently opening new savings accounts (again) as rates keep being cut and cut. Is there a very low risk investment that may give a more meaningful return than cash and perhaps won't require me to keep switching every few months?
Basically no. Bond funds have risk if interest rates rise (the prices of the bonds will fall). Yields (returns) on many British govt bonds ("gilts") right now are actually less than zero (large investors like pension funds don't have the option of depositing all their money in £85k lumps across UK guaranteed accounts, so they buy the lowest credit (default/ bankruptcy) risk investment they can find-- the UK government).

(Yield = income/ price; so for a bank account paying 1% it is 1%. For bonds, it's a little more complicated and is called Yield To Maturity or sometimes (British usage) Gross Redemption Yield. If you look in the financial pages, they often quote 2 yields for a bond "running yield" = income/ price and YTM, it's the latter which is the better guide to your returns from holding the bond).

There are notice accounts that give you a preferential rate for a period of time. So tying up your money for longer.

Almost any other investment is going to expose you to interest rate risk - the risk that your investment will fall in value if interest rates rise. Ditto credit risk (the risk that the borrower goes bust, and you lose some or all of your money). For example there is a whole scandal with unregulated "Bonds" - where investors were sucked into buying investments which promised a high rate of return (but turned out not to be approved by the Financial Conduct Authority), lending companies money, and most or all of the money was lost.

Probably more money in finance is lost chasing a higher yield (interest rate) than any other way. If it looks too good to be true then it probably is. Right now, 0% at a High Street clearing bank is actually not a bad rate.
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