£200k to be saved - where/how

village_life

Hi

someone I know has just come into some money - ~£200k. The money is not needed for day to day living, so its a large sum of money to think about what to do with it.

The person in question doesnt want to invest the funds in anything risky - so no investments/stocks etc, and obviously there is the FSCS £85k consideration - but are there any other options of what to do with this money which is safe, to which there is the potential for access (should that be necessary) and minimises/eliminates inflation erosion of the funds?

obviously splitting the money into chunks so that some can be instant access and the majority non accessible for a period would be a good idea?

thoughts?

Loughton_Monkey

That's a lot of money to 'save' rather than 'invest'. Sadly, though, there are virtually no savings accounts that currently look anything like keeping up with inflation, let alone beating it. Long term bonds (~5 years) seem to offer rates that currently just beat inflation, but clearly come with the 'risk' that sometime within the 5 years, the money is locked into what by then could be a dismal rate.

I can't think of anything better than simply 'shopping around' all the fixed rate bonds, notice accounts, internet accounts on the usual comparison sites (including this one) and 'hedge' the money around a mixture of accounts and terms. They need to take into account the (small) scope, if any, for using tax free ISA amounts, and also the timing of interest payment - as this might affect their tax situation if interest payments are not 'timed' optimally.

bigfreddiel

village_life wrote: »

Hi

someone I know has just come into some money - ~£200k. The money is not needed for day to day living, so its a large sum of money to think about what to do with it.

The person in question doesnt want to invest the funds in anything risky - so no investments/stocks etc, and obviously there is the FSCS £85k consideration - but are there any other options of what to do with this money which is safe, to which there is the potential for access (should that be necessary) and minimises/eliminates inflation erosion of the funds?

obviously splitting the money into chunks so that some can be instant access and the majority non accessible for a period would be a good idea?

thoughts?

you need an ifa - unbiased.co.uk

jimjames

They also need to consider what is risky - savings decreasing each year in real terms as inflation eats into them or somewhere with the ability for at least part of it to grow. As mentioned by one of the IFAs on the board risk is not an on/off switch but a sliding scale and not all money needs to be "at risk"

ThriftyFelicity

One possibility:

£20,175 into three Lloyds current accounts (£6725 into each) - 4%
£35,965 into a one-year fixed term - 3.25% (FirstSave)
£35,965 into a two-year fixed term - 3.70% (Kent Reliance)
£35,965 into a three-year fixed term - 4.15% (Coventry BS)
£35,965 into a four-year fixed term - 4.25% (Wesleyan Bank)
£35,965 into a five-year fixed term - 4.75% (Coventry BS)

The Lloyds accounts are instant access, and pay 4% if you have between £5k-£7k in them (the full £7000 could be put into each one, but that means the interest earned every month would have to be shifted into another interest-bearing account, as amounts over £7k don't earn interest). Standing orders will have to be set up to cycle £1k through each Lloyds account once a month (A to B to C and back to A), because they have to have £1k credited to them each month in order to earn interest.

In one year's time, the £200,000 will have grown to £208,037 (around 4% interest). The one-year term deposit will have matured, and can be reinvested into a five-year fixed term. In two years' time, when the two-year deposit matures, it can be invested into a five-year fixed term.

This "laddering" of cash into fixed-term deposits of varying lengths, and then reinvesting when each matures for a five-year term, means that you can take advantage of the higher interest rates that a longer term will offer, without having all the cash tied up for five years.

If your friend doesn't have ISAs, then £5100 should be put into an ISA before the rest of the cash is divvied up.

p.s. I didn't double-check to see if any of the banks/building societies above share a banking license, so that would have to be checked as well.

padington

ThriftyFelicity wrote: »

One possibility:

£20,175 into three Lloyds current accounts (£6725 into each) - 4%
£35,965 into a one-year fixed term - 3.25% (FirstSave)
£35,965 into a two-year fixed term - 3.70% (Kent Reliance)
£35,965 into a three-year fixed term - 4.15% (Coventry BS)
£35,965 into a four-year fixed term - 4.25% (Wesleyan Bank)
£35,965 into a five-year fixed term - 4.75% (Coventry BS)

The Lloyds accounts are instant access, and pay 4% if you have between £5k-£7k in them (the full £7000 could be put into each one, but that means the interest earned every month would have to be shifted into another interest-bearing account, as amounts over £7k don't earn interest). Standing orders will have to be set up to cycle £1k through each Lloyds account once a month (A to B to C and back to A), because they have to have £1k credited to them each month in order to earn interest.

In one year's time, the £200,000 will have grown to £208,037 (around 4% interest). The one-year term deposit will have matured, and can be reinvested into a five-year fixed term. In two years' time, when the two-year deposit matures, it can be invested into a five-year fixed term.

This "laddering" of cash into fixed-term deposits of varying lengths, and then reinvesting when each matures for a five-year term, means that you can take advantage of the higher interest rates that a longer term will offer, without having all the cash tied up for five years.

If your friend doesn't have ISAs, then £5100 should be put into an ISA before the rest of the cash is divvied up.

p.s. I didn't double-check to see if any of the banks/building societies above share a banking license, so that would have to be checked as well.

... and by the end of it your money may buy you the same as it does today. In my mind thats not saving, its going around in circles. I would get a good rental property, rent it out and invest the profit in a business you can smell and touch run by someone you know or buy mining shares.

ThriftyFelicity

padington wrote: »

... and by the end of it your money may buy you the same as it does today.

Yes, and that's what the OP requested... safe, potential for access, and inflation erosion to be minimised/eliminated.

I wouldn't class rental property or a business as being very liquid, nor mining shares as particularly safe.

psychic_teabag

One small variation on that is to take those 1- and 2-year fixed pots and put at least £50k in Newcastle 5-year bond at 3.7%. Because it allows access with 120 days notice, you can just give notice after 8 months and withdraw some/all after 12 (so beating the 1-year fixed rate) but you have the option of leaving for up to 2 years (matching the 2-year fix), or even longer if rates have fallen.

Could put all 70k there, and then take out a little each year to put into ISAs.

Actually, even just putting £35k in there for a year beats the suggested 1-year fix rate. (3.35% for 25k-50k deposited)

ThriftyFelicity

psychic_teabag wrote: »

One small variation on that is to take those 1- and 2-year fixed pots and put at least £50k in Newcastle 5-year bond at 3.7%. Because it allows access with 120 days notice, you can just give notice after 8 months and withdraw some/all after 12 (so beating the 1-year fixed rate) but you have the option of leaving for up to 2 years (matching the 2-year fix), or even longer if rates have fallen.

Could put all 70k there, and then take out a little each year to put into ISAs.

Actually, even just putting £35k in there for a year beats the suggested 1-year fix rate.

Didn't know about the Newcastle one... that's a good one, and if both the one- and two-year amounts were put into it, it would allow penalty-free access with notice, which I don't think the FirstSave and Kent Reliance ones do.

padington

ThriftyFelicity wrote: »

Yes, and that's what the OP requested... safe, potential for access, and inflation erosion to be minimised/eliminated.

I wouldn't class rental property or a business as being very liquid, nor mining shares as particularly safe.

I'm just questioning the wisdom of giving 200k to the banks who wont give you anything in return apart from the promise that they wont lose it. I would ask your friend to reconsider his expectations of what it means to 'save' in 2011. Does he realise that may mean his money will be worth less than it is now ?

Its like locking a horse up in a barn for a whole year or two. Really bad move unless time is so, so precious and money easy to come by.