1yr bond

pauldb_2

My parents have about £300k which in the long-run will supplement their pension (which begins in 18months), but which until then they want to stick in the bank, or equivalent. (There are obviously arguments about investment funds, but they want to have a free hand when they know the value of their pension in 18 months time so I believe cash-equivalents are the right idea.)

My suggestion is that they put it into an Anglo-Irish 1yr bond which pays 5.85%. They have other funds so locking it up for all-but-emergencies is not an issue. But I have two questions:

i) Is putting it all in one place a risk? There are other/accounts bonds which pay nearly the same - is spreading the [minor] risk worthwhile or a waste of time/interest?

ii) Interest will be their only income next tax year, but it will exceed their zero-band. Can they apply to receive interest gross and then settle with the taxman, or will they have to receive net and be able to reclaim the over-tax after it is paid?

Thanks!

[Deleted User]

Of course, the market and rates are now due for another shake-out following the surprise MPC decision to increase the BOE rate from 5.00% to 5.25% today.

pauldb_2

Yes, I think they ought to wait a week and see what rates are offered, but the general questions still stand.

dunstonh

ii) Interest will be their only income next tax year, but it will exceed their zero-band. Can they apply to receive interest gross and then settle with the taxman, or will they have to receive net and be able to reclaim the over-tax after it is paid?

Are deposit based savings accounts going to be the right option?

Obviously we dont have the facts but if they are possibly going to have a low pension income, then placing it on deposit could wipe out any chance of pension credits.

From a tax point of view, they wont be non taxpayers as £300k at 5% = £15,000. Assuming joint and below age of 65, that gives them a personal allowance of £10,070 (will increase a little next tax year). So, they will be liable to some of it being taxed. Almost certainly, a tax return will need to be sent in to resolve the correction taxation.

Heinz

Before this afternoon's base rate rise, one of Martin's recommendations was an A&L 5.64% account - but that's limited to £100k per saver. A&L aren't good at matching BofE rises though so I doubt that'll increase to 5.89%.

Anyway, even with one of those each, they'd still be looking to stash another £100k.

pauldb_2

Thanks for your help. They have a decent private pension as well so I doubt they would be disadvantaging themselves.

I know they'll exceed their personal allowances, but do they have the choice/right to get paid gross and then settle, rather than the other way around?

Is there a wrapper that is low risk but returns their interest as a capital gain so they can use their CGT allowance? Something like a government bond unit trust I guess - how do I find the right one?

dunstonh

they should fully utilise their £7k ISAs each in this and next tax year. They can go low risk if they want but at least it sticks £28k into tax free over that period (and keep feeding 14k in per year).

Interest is income and isnt classed as a capital gain. So CGT doesnt apply.

I know they'll exceed their personal allowances, but do they have the choice/right to get paid gross and then settle, rather than the other way around?

I dont know. One for the accountants or someone in that position to answer.

missile

pauldb wrote:

I know they'll exceed their personal allowances, but do they have the choice/right to get paid gross and then settle, rather than the other way around?

On deposit accounts the only way you get it gross is to declare you are a non tax payer. This is tax evasion and the tax man will find out.

cheerfulcat

pauldb wrote:

ii) Interest will be their only income next tax year, but it will exceed their zero-band. Can they apply to receive interest gross and then settle with the taxman, or will they have to receive net and be able to reclaim the over-tax after it is paid?

The second one; they will have to reclaim any overpaid tax. Money market deposit accounts mostly pay interest gross on balances over £50,000 but usually don't have the most competetive rates.

Robert_Sterling

There is some, albeit very small, risk having £300,000 in one account.
Only the first £2,000 is guaranteed safe. Of the next £33,000 only 90% is guaranteed safe. The rest might be lost.

Put the money in a joint account, Mum & Dad, and you get £4000 and £66,000 in place of 2,000 and £33,000.

Have 4 joint accounts and you will then have

£32,000 and £264,000 with some guarantee.

I trust you can see where I am going.

Is it too much trouble to open so many accounts?

Your call or your mum & dad's.

I know what I would do since I am risk averse.

Mikeyorks

pauldb wrote:

I know they'll exceed their personal allowances, but do they have the choice/right to get paid gross and then settle, rather than the other way around?

No - they can't legally claim gross interest. There is an HMRC Help sheet, for use when determining if the R85, to claim gross interest, is applicable. It clarifies that gross bank interest has to be added on the 'Income' side - thereby generating a 'No' to filing in your parents case.

(Would have added the link - but Adobe is reporting the .pdf file on the HMRC site is corrupt)