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Where to stash your cash
A Census Financial client presented us with a fairly typical cash scenario recently. She said she had just received a £3,500 bonus from work that she wanted to put away as she didn’t need it immediately.
She also was in the fortunate position of having some excess cash available from her salary at the end of every month - around £200 – and she wanted advice on what to do with it in terms of opening a savings account.
We pointed out that if she needed access to some rainy-day money, as well as a fund that would be out away for a longer period, then she should consider opening two separate accounts. Her lump sum bonus would give her an opportunity to use up her ISA allowance for this tax year (£5,340), so she might place it in a fixed-rate cash ISA. This would give her tax-free savings and the longer she would be prepared to put it away, the better the market rates it would command. For example, if she were able to put the money away for four to five years, she might expect interest rates of around 4% - 5%, compared with 3% and 4% for a shorter term....but of course rates may well rise in the interim.
We suggested that the best way to manage the remaining money from her salary would be to open a regular savings account. This would enable her to earn interest from her savings but also have immediate access to cash should she have need of it. The only considerations are that she would have to pay tax on the interest and there may well be penalties if she should miss a regular payment. However, at the start of the next financial year, this would give her the option of transferring the money into either a fixed-term or instant-access ISA, as her circumstances might dictate. For example, Nat West is currently offering a three-year fixed rate ISA which pays 3.7% with a minimum £1000 investment.
Another option might be to consider the index-linked bond from National Savings and investment. Savers can invest from £100 to £15,000 tax-free in this five-year account. The interest rate is linked to the retail price index (RPI) plus 0.5%, NS&I works it out each year by examining the RPI from the start and end of each year of the investment.
Chartered Financial Planner