Where To Put Your Cash
July 2020
Please note that this is not intended as financial advice specific to your particular circumstances
You're fortunate enough to have a chunk of money stashed away but for whatever reason - it's your 'safety net', you're about to buy a new home, etc. - you do not want to invest it in the 'the market' and you would like to have access to it immediately if/when you need it.
Most banks are paying virtually no interest on 'easy-access' savings accounts. The bank that's paying the best rate, Marcus by Goldman Sachs, is closed to new customers due to high demand. So, where do you go?
The short answer: NS&I Income Bonds.
Why?
HOWEVER, NS&I Income Bonds are not necessarily the best option for everyone - especially someone who pays income tax at the 45% rate.
The long(er) answer...
Everyone has an annual 'personal savings allowance', which means that:
Therefore, the 1.15% interest rate from NS&I Income Bonds becomes, effectively, 0.6325% for a 45% taxpayer (or 0.69% for a 40% taxpayer once they exhaust their £500 'savings allowance').
This is where NS&I Premium Bonds can be very useful.
Premium Bonds are a little weird. They are like a zero-interest savings account that gives you a lottery ticket. The top monthly prize is £1 million (yes, you could win £1 million!). The lowest monthly prize is £25. Or you could win nothing. So there is no fixed/guaranteed interest rate.
There is, however, a 'prize rate' which is the percentage of the pot that is paid out to the winners. The prize rate is 1.4%, which looks pretty attractive on the surface. However, a person with only £1,000 or so would, with average luck, receive nothing. Yet, the more you save, the more likely your return will be close to the 'prize rate' of 1.4%. So it's more attractive the more you have to save. (Why? Lottery maths; either trust me or read all about it here).
Why am I boring you with Premium Bond maths? Because premium bonds are tax-free.
So... if you are a 45% taxpayer (or have otherwise exhausted your 'savings allowance') then Premium Bonds are probably the best bet. If, for example, you are able to save the maximum allowable amount of £50,000 in Premium Bonds and you had average luck, you would expect to earn about 1% tax-free. Which is better than the 0.6325% net of tax return that NS&I Income Bonds would pay you.
Just like NS&I Income Bonds, NS&I Premium Bonds are also backed by HM Treasury and are accessible immediately (again, the tech is clunky and it takes a few days - but c'est la vie).
In Sum
Everyone is different so please don't take this as advice for your particular circumstances but as a general rule of thumb the below works well:
Most banks are paying virtually no interest on 'easy-access' savings accounts. The bank that's paying the best rate, Marcus by Goldman Sachs, is closed to new customers due to high demand. So, where do you go?
The short answer: NS&I Income Bonds.
Why?
- 1.15% annual interest; paid monthly
- Fully backed by HM Treasury, which means that your money is totally safe (even safer than a bank, where the protection is limited to £85,000)
- You may withdraw money at any time (though it usually takes a few days; these government-backed entities aren't as slick as Monzo...)
HOWEVER, NS&I Income Bonds are not necessarily the best option for everyone - especially someone who pays income tax at the 45% rate.
The long(er) answer...
Everyone has an annual 'personal savings allowance', which means that:
- For 'Basic Rate' taxpayers (those who pay 20%; typically people who earn £12,500-£50,000 per year): the first £1,000 of interest income is tax-free. Any additional interest income is taxed at 20%. (And, in fact, someone earning less than £17,500 has a higher 'savings allowance'; see here for more details)
- For 'Higher Rate' taxpayers (those who pay 40%; typically people who earn £50-150k per year): the first £500 of interest income is tax-free. Any additional interest income is taxed at 40%.
- For 'Additional Rate' taxpayers (those who pay 45%; typically people who earn more than £150k per year): there is no 'savings allowance' meaning all interest income is taxed at 45%.
Therefore, the 1.15% interest rate from NS&I Income Bonds becomes, effectively, 0.6325% for a 45% taxpayer (or 0.69% for a 40% taxpayer once they exhaust their £500 'savings allowance').
This is where NS&I Premium Bonds can be very useful.
Premium Bonds are a little weird. They are like a zero-interest savings account that gives you a lottery ticket. The top monthly prize is £1 million (yes, you could win £1 million!). The lowest monthly prize is £25. Or you could win nothing. So there is no fixed/guaranteed interest rate.
There is, however, a 'prize rate' which is the percentage of the pot that is paid out to the winners. The prize rate is 1.4%, which looks pretty attractive on the surface. However, a person with only £1,000 or so would, with average luck, receive nothing. Yet, the more you save, the more likely your return will be close to the 'prize rate' of 1.4%. So it's more attractive the more you have to save. (Why? Lottery maths; either trust me or read all about it here).
Why am I boring you with Premium Bond maths? Because premium bonds are tax-free.
So... if you are a 45% taxpayer (or have otherwise exhausted your 'savings allowance') then Premium Bonds are probably the best bet. If, for example, you are able to save the maximum allowable amount of £50,000 in Premium Bonds and you had average luck, you would expect to earn about 1% tax-free. Which is better than the 0.6325% net of tax return that NS&I Income Bonds would pay you.
Just like NS&I Income Bonds, NS&I Premium Bonds are also backed by HM Treasury and are accessible immediately (again, the tech is clunky and it takes a few days - but c'est la vie).
In Sum
Everyone is different so please don't take this as advice for your particular circumstances but as a general rule of thumb the below works well:
- Save using NS&I Income Bonds until your annual tax-free 'personal savings allowance' is exhausted. Remember, if you are a 45% taxpayer then you have no savings allowance. Also, if appropriate for you, remember that you can utilise your partner/spouse's savings allowance (e.g. a spouse with a 20% tax rate will have £1,000 of tax free interest income so perhaps put some savings in their name in order to take advantage of their savings allowance).
- Save using NS&I Premium Bonds up to the maximum allowable amount of £50,000 per person. Remember, you don't get a fixed interest rate so don't shoot me if you get paid less than 1% but with average luck you will get paid that tax-free (and if you win £1 million then you can send some champagne my way - cheers).
- If you still have cash to save then put the excess into NS&I Income Bonds, up to the maximum allowable amount of £1 million per person.
I hope that is helpful to you. If you would like to learn more about how TindleWealth can help you plan your finances and manage your investments, below are some links that outline our specific services. Or simply contact me directly on the details below.
Professionals Program - for higher earning professionals
Expats - those living in the UK or Brits living abroad who have assets in the UK
Pensions, Later Life & Inheritance Tax Planning - typically for those looking to maintain their ability to afford their desired standard of life for the rest of their lives and to leave a financial legacy to future generations
--
Scott Tindle, CFA is the Founder & Director of Wealth Management at Tindle Wealth Management
+44 (0)203 858 0637
scott@tindlewealth.com
I hope that is helpful to you. If you would like to learn more about how TindleWealth can help you plan your finances and manage your investments, below are some links that outline our specific services. Or simply contact me directly on the details below.
Professionals Program - for higher earning professionals
Expats - those living in the UK or Brits living abroad who have assets in the UK
Pensions, Later Life & Inheritance Tax Planning - typically for those looking to maintain their ability to afford their desired standard of life for the rest of their lives and to leave a financial legacy to future generations
--
Scott Tindle, CFA is the Founder & Director of Wealth Management at Tindle Wealth Management
+44 (0)203 858 0637
scott@tindlewealth.com