Why charities are feeling the effects of high inflation and low interest rates – iNews

Cash is king for charities. It remains the most popular way for the public to support fundraising, and the Charities Aid Foundation recently appealed for people to give any spare loose change they have to help organisations rebuild financially after a tough 18 months of the pandemic.
The role of cash in charity finances is, however, much more than simply a case of looking after the pennies that mount up from cash donations.
Many charities have significant sums of money in cash deposit accounts that form a crucial part of their reserves and play a major role in funding services.
Reserves are vital when charities experience a drop in income, and with more than half of the charities we surveyed in our recent research reporting a drop in income of more than a third since the start of the pandemic they have become more important than ever.
The big concern about cash deposit accounts is that rates are at historic lows. The Bank of England’s Monetary Policy Committee’s decision to cut the base rate to 0.1 per cent in March last year from 0.75 per cent in January has only added to the pain.
Charities have felt the effect with most now receiving negative real returns on their cash deposits once high inflation is taken into account, with the rate hitting 3.2 per cent earlier this week beginning 13 September.
The average rate on a charity cash deposit account for £10,000 is around 0.28 per cent AER. You would expect the rate to rise for bigger deposits, but you should not expect much of an increase. The average rate is 0.30 per cent AER for deposits of more than £100,000 and 0.31 per cent AER for those of more than £1m.
There is still competition among banks and building societies in the charity cash deposit account market, so it pays to shop around to find the best possible rate. Around one-in-four cash deposit accounts currently offer charities less than 0.1 per cent AER on balances of £50,000, but there are almost 30 accounts paying 0.5 per cent AER or more.
Analysis of the latest industry data by James Hambro & Partners shows that charities generate around £53.5bn a year in income, but their expenditure accounts for around 96 per cent of this.
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Generating the best possible return from their reserves is important for charities. It’s become even more so after 18 months of social distancing and lockdowns have made fundraising more difficult, even as the pandemic has driven up demand for charity services.
Negative returns on cash deposit accounts mean more voluntary organisations are looking at their reserves and considering whether they can afford to take on more risk to earn better returns. Charities with investment assets have benefited from stock market growth since the early part of the pandemic, but portfolios targeting high levels of income have suffered as share dividends have been cut or cancelled.
Our analysis of FTSE 100 companies reveals that last year, 32 cancelled their dividends, nine cut them and 13 firms suspended them. The continued fall in bond yields has also added to the challenge for income investors. In our experience charities that have been able to take a total return approach, targeting returns through capital growth as well as income, have fared better.
Strong and responsible investment management can play an important role in helping charities to ensure they are achieving the best possible returns on their assets to support their activities, despite the pressure on donations and fund-raising. This is particularly true while returns on cash are non-existent or negative after inflation.
Charities need our money if they are to continue to deliver the important services that so many of us value, but they also need support in managing their money as we emerge from the pandemic.
Nicola Barber is head of charities at wealth manager James Hambro & Partners
All rights reserved. © 2021 Associated Newspapers Limited.

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