Where to invest around £16000?

investme

As the title suggestion, looking to put away some money.

I'm a student, so currently don't pay tax, but that will end in 2 years.

My thoughts so far are the 5 year fixed bond account with the AA which pays an interest of 4.6% which is calculated daily and paid yearly.

Would it be wise to also have an ISA? i was looking at one which is fixed until may 2016 which pays 5% and allows you to pay in £5000.

Any suggestions? This money can be put away for about 5 years or so, when i expect i'll need to use it towards a deposit for a house / flat. Basically i don't intend to use it, the interest will be paid back into the account so it can grow as much as possible - so ideally, highest interest account possible.

I presume i should steer clear of any sort of "investment account" which dabbles my cash in shares etc, worth it or a gimmick?

Lokolo_2

It depends on your attitude to risk, but I would use ISA's and fixed rate bonds in the scenario you have mentioned.

Even if you are not currently a taxpayer, if you deposit into an ISA, then you will still be earning tax-free interest on the money in there when you do start to work and pay tax, so it is useful to keep money shielded there (you can put in up to £5340 this tax year) The fixed rate ISA you mentioned is a good choice if you do not see yourself needing access to the money for that 5yr period.

With the rest, you could put £10k into a fixed rate bond, Kent Reliance BS have a 5% for 5 years offer, which beats the AA's rate, although it is a postal operated account. (not a big deal as the money will be locked away for 5yrs anyway!) Remember to opt for gross interest when you apply for these accounts otherwise tax will be deducted off your interest.

Then the remaining £640, keep that in an instant access savings account just for emergencies, that would be your best bet, or if you already have enough emergency funds, simply deposit it along with the £10k above.

investme

I was also looking at NS&I savings certificates which state they are tax free and offer 5% interest, would that be better than the AA or the kent reliance BS bond?

Thanks

Lokolo_2

investme wrote: »

I was also looking at NS&I savings certificates which state they are tax free and offer 5% interest, would that be better than the AA or the kent reliance BS bond?

Thanks

Ah yes I forgot about those, they are definitely a better choice also due to the fact that the interest is tax-free! The interest that these give will depend on levels of inflation, so you may not always get "5%" as it varies from year to year.

investme

Hmm thats true

So do you think my best bet is to max out a 5% ISA and put the rest in a NS&I certificate?
As for having emergency money, i'm still going to have about £4000-£5000 i need to save somewhere, but ideally i'd like that easy access so will just shop around for the best high street rates.

Lokolo_2

investme wrote: »

Hmm thats true

So do you think my best bet is to max out a 5% ISA and put the rest in a NS&I certificate?
As for having emergency money, i'm still going to have about £4000-£5000 i need to save somewhere, but ideally i'd like that easy access so will just shop around for the best high street rates.

Yes I would say that is your best bet, you sound like you have a reasonable plan with regards to having some money accessible (remember to also claim gross interest on this account) so I would say you are sorted :beer:

investme

Great cheers i'll look into it, i presume the NS&I certificate won't drop much below 5% anyway, unless something horrific happens to our economy?

Lokolo_2

investme wrote: »

Great cheers i'll look into it, i presume the NS&I certificate won't drop much below 5% anyway, unless something horrific happens to our economy?

Yes that's right, although it's difficult to predict inflation, but in my opinion it will probably stay high'ish for the next few years. Earning tax-free interest is the best benefit though as you'd need a taxable savings account giving over 6% to beat the tax-free "5%" NS&I certs! Also you never know when NS&I will withdraw these certificates from the market, when they raise their target funds.

kidmugsy

Another way to approach it is to ask "how much do I want on instant access?" Bung that into an ISA (because it may eventually stay there until your tax-paying years) and pop the rest into the ILSC. After one year the penalty for withdawing money from the ILSC becomes small, so that you can view it as almost-instant access. Therefore revisit your decision - you may then want to transfer the ISA into a fixed rate one, or to withdraw enough cash from the ILSC to open some new, more appealing, ISA. Eventually you want everything sheltered from tax when you become a tax-payer.

Remember that you want to make a good decision: there is no "best" decision available, because no-one knows what the future holds. So don't fret - any good decision is good enough.

investme

So what you're saying in short is to put all of what i want to save into the ILSC, with the exception of an amount that i want as instant access, which can go into a regular ISA in case i need it.

then after the first year, i could re invest the money in the ISA in a fixed one for higher interest, as i would be able to withdraw from the ILSC without too much of a penalty, correct?

kidmugsy

Exactly: that's what I'd consider in your shoes.

"I presume i should steer clear of any sort of "investment account" which dabbles my cash in shares etc, worth it or a gimmick?" Agreed - steer clear: that's for the long term and your financial horizon is shorter.