What should you do with savings?

[spuddy56]

We have been saving for a house and have about £50k in savings however we have decided now is not the right time to buy as we can't afford the asking prices and interest rates combined. At the moment the money is in an easy access savings account and some in NS and I as we had thought we would need it imminently. Where should we put the money? We have no idea about this sort of thing and my parents have never had spare money so we are not sure what is the best thing when it comes to interest etc. Thank you for any help/experience.

Are you under 40? You could start a lifetime ISA and every year transfer the maximum £4K into it and get the free government top up of £1k.

It also only needs to be one year from when you opened the account to when you can use it to buy your first home.

You can do £4K every year until you are ready to buy.

www.moneysavingexpert.com/savings/lifetime-isas/

We use St James' place - they do allocate the full ISA allowances before investments. We're on a down turn at the moment which I'm not too worried about long term but if you wanted it out within a year or two I probably wouldn't. I might be tempted otherwise to invest in premium bonds.

Definitely don't invest. You could lose a lot of your money.

Your choice is instant access, fixed/notice accounts, or premium bonds.

Have a look on Moneysaving Expert for the best rates. You should be able to get 4% on a notice account I think, but also be aware of tax on interest if you exceed the personal savings allowance and how to get round this eg cash ISA or premium bonds. Also keep an eye on things as interest rates change.

If house prices fall and interest rates stabilise, you could be in a good place to buy in a year or two's time so keep an eye on these too and be ready to buy if things improve for you.

Thank yo. We thought about an ISA but my partner is European and we are thinking about buying there instead of the UK so thought that might be quite risky.

Thank you very much for the tips on the premium bonds, savings accounts and interest tax. The government website for the bands is confusing as it says a higher rate tax payer is someone earning over £37,000 but I thought it was about £50,000? We both earn about 40k. Would we end up paying interest tax on 50k of savings?

That would piss me off...not only can we not afford a modest house, they then make more money out of us for trying to do the right thing and save a deposit argh!

Nothing in the market now beats the guaranteed tax free 25% return you get on a lifetime ISA.

Oh too bad, just saw you might buy abroad. You can’t use a LISA to buy a home outside the U.K.

But you could buy a U.K. home, then sell it a year later to buy a home abroad. It might be worth it to get the tax free extra £1k/yr (not including the usual interest and growth that also happens in a LISA).

Do some number crunching.

Band Taxable income Tax rate
Personal Allowance Up to £12,570 0%
Basic rate £12,571 to £50,270 20%
Higher rate £50,271 to £150,000 40%
Additional rate over £150,000 45%

£37000 is the amount of income that is subject to tax at 20%, i.e. the amount between personal allowance and when higher rate kicks in.

Interest or increases on ISAs and winnings on premium bonds don’t attract income tax. Other savings accounts do but there is an annual allowance which varies depending on your tax position (see gov.uk). Because interest rates have been so low for so long, this hasn’t been an issue for most people lately.

What is your income tax rate? If you are basic rate tax payers, then a high-interest savings account is likely your best answer. If you are 40% or 45% tax payers, then a better option could be a short-term Gilt as you can make a c. 3.5% to 4% return per annum after tax and risk free, depending on which one you buy. This compares with a c. 2.7% return before tax in a high-interest savings account.

Just saw you are basic rate tax payers. In that case, a high interest savings account is likely the best answer. You have an annual tax-free interest allowance of £1,000 each. If the money is held in a joint account or each of you holds half of it in your own name, then the interest rate would need to be 4% before you need to start paying tax on it. As most savings account aren't yet paying interest approaching this level, you shouldn't need to pay tax on the interest you earn. Money Saving Expert is the best place to find high interest savings accounts. You will get much better interest rates if you lock your money up for a bit. There are some listed on the MSE website offering interest of around 2.7% p.a. provided you give 90 or 180 days notice for withdrawals, which sounds like it could work for you. Barclays has an instant access savings account offering an interest rate of 5.12% but you can only put £5K in it.

This is so helpful, I really appreciate this as it's something we know so little about. Thank you for taking the time to explain and write it.

And thank you @Chewbecca for explaining the tax bands, of course that makes sense now you've spelt it out haha! Thank you :)

Good point @Discovereads on buying for a year then going abroad, that is one consideration. The Europe plan is more of a 5 year plan and our 5 years keeps moving with every year that goes on 😂

Thanks again all.

I just transferred my cash ISA’s into a 2y fixed rate, cash ISA paying 4.2% with Santander. I’m happy to tie up for 2y but think the 1y ISA was paying 4% if you didn’t want to fix for 2y.

Sorry, 18m is 4.00%, 12m is 3.70%

www.santander.co.uk/personal/savings-and-investments/isas/2-year-fixed-rate-isa