savings advice - bonds compaired to 3-5%AER

mush1234

Hi All,

I need some advice....

I currently have £27k sitting in bonds, this month I earnt £150 from them (iv only had them in there for a month though, so who knows what will happen next month)

But im trying to compaire bonds with savings accounts to figure out where my money is best kept

Im looking at savings accounts with 5%AER...but Im totaly lost as to what that would equate to with £27k worth of savings....can anyone help with some advice - maybe give me a rough idea?

Also, In 18months Ill be taking that £27k and paying off my mortgarge - while I understand that paying off a mortgage sooner rather than later is a better way of making/saving money, I unfortunatly will be fined if I pay mine off too soon, so Im saving the cash untill then - in about 18months time.

cheers!

Stompa

mush1234 wrote: »

Im looking at savings accounts with 5%AER...

Well 5% on £27k would be £1350pa before tax. But where are you finding savings accounts which pay 5% AER.....?

LongTermLurker

If your bonds are in an ISA, the income and any growth will be tax free (though I guess in 1 month you don't have all 27k in an ISA...)

If you wind your bond income on for a year, that's a potential £1800 or 6.66%, though variable, but as Stompa says, where on earth do you find a 5% account that would take £27k (note that after tax that would be a 4% or 3% account, depending on your marginal rate)

xrjtg

There's also a risk that, should interest rates rise or one of the companies whose bonds your hold defaults, the value of your holding could fall. If you're happy with that risk then the yields you quoted are better than you could earn from a savings account.

mush1234

I have no idea where i got 5% from either?! seems 2.5% would be more accurate....Oh well

I suppose what Im asked (at the end of the day and all that) - is £27K in bonds the best way to save my cash for an 18 month period, would I be better for example finding a high intrest account, or putting it in an isa (10k for me, 10k for wife, 7k saving account/bonds)?

Ill admit Im totaly lost when it comes to %%% and savings. Really looking for advice.

LongTermLurker

The main factors are

• cash savings are secure and won't fall in value
• however, cash will only generate 2.5% income
• between you, you could put £10200 into a cash ISA
• bonds are loans to companies - if the company fails, you will lose that part of your bond
• the company may not fail, but instead choose to default - in other words, they may refuse to pay the bond back, thus you will lose that part of the bond
• however, because of the greater risk to capital, bonds tend to pay better income than cash - hense your 6.6%
• You can put bonds into a stocks & shares ISA - between you, you could put £20400 into a S&S ISA
• whether cash or bonds, if they're in an ISA you won't pay any tax on income, so the rate you see is the rate you get
• outside an ISA, your income is taxed at 20% or 40%, like your earnings

You don't say if your bonds are all with one individual company, or individual boinds with multiple companies, or a bond fund. The first is extremely risky, see bullets 4 and 5 above. The fund is the least risky, because if one underlying company defaults, the loss is shared between all fund members.

So, you'll see with bonds, your £27k may become £26k, 20k or nothing at all (if it's with one company that defaults) but assuming you're in a fund, then even if your part of the fund drops to, say £26500, you would expect the income to compensate you for that risk. A bond fund could easily grow to £28k, £30k, etc if you're lucky (that's as well as the £1800 income mentioned).

All in all, 2.5% is pitiful, especially when you consider the small amount of cash that can be sheltered from tax, and I would say a bond fund offering 6.6% (most of which can be made tax free) is good recompense for the possible extra risk - however, you have to decide if the potential fall in 18 months is too risky for your liking.