Where to save £5000? Mix of ISA and TSB plus account, or something else?

[OhdearImstuck]

This is my first time trying to think relatively smartly about where to put my money that it will earn a little interest.

I've read some articles on moneysavingexpert.com and from what I can see, a good idea would be to put £2000 in a TSB classic plus account, and then the rest in an ISA? I might want to withdraw about £1000 over the next few months, so thinking Lloyds is too risky in case it dips under £4k. Does that sound right?

Are there any other good options? I'm finding it a bit confusing!

Any opinions gratefully welcomed

Nationwide's Instant Saver Cash ISA pays 1.4% with unlimited withdrawals and no notice period: www.nationwide.co.uk/products/savings/instant-isa-saver/features-and-benefits

I suggest you use that rate as a baseline when working out if you can get a better return from other accounts.

I'm not familiar with the TSB account but I assume it's pay in £x amount a month; have x direct debits; pay a monthly fee and they'll pay you interest? Some current accounts do pay the highest interest rates at the moment, so you're thinking on the right lines.

ISAs and 'normal' savings accounts pay higher on fixed term accounts (rather than instant access) but you'd be looking at a fixed term of 2 or 3 years to get a decent rate, and even those tend to be lower rates than those offered by some current accounts.

An added complication is that the rules about paying tax on interest will change in April 2016. You'll be able to earn up to £1000 in interest tax free so banks etc will stop deducting tax from interest payments. If interest rates stay the same, a lot of currently 'taxable' accounts will end up paying more interest than ISAs.

So use Nationwide's 1.4% as a baseline and see how you could do better. I'd recommend actually calculating the amount you'll receive in interest because sometimes you get hung up on getting the highest rate but then realise that would give you only a few extra pounds over the course of a year and that might not be worth the hassle of multiple accounts and moving money around etc.

if you don't pay tax, use the TSB account. If you earn under about £16k, you don't pay interest on savings this year.

If you don't pay higher rate tax, still use the TSB account; the interest after tax (even if you are taxed on the lot) is still more.

the highest cash ISA rate possible is 2.51% and that is on a five year fix. Not a lock-in (ISAs can't be) but still half what you get at TSB.

the TSB Classic Plus has no fee, doesn't need direct debits, although it does need a minimum pay in. That's easy if you have more than one account, just set up standing orders. It has a linked 5% monthly saver, but you can only pay in £250 a month so that is also going to generate not much.

the other no direct-debit options are Nationwide at 5% and Tesco at 3%.

of course it will only earn a fiver or so a month but that's good in the current climate. You CAN only get a few pounds in interest.