Best Place for £5,000 Savings - ISA or High Interest Current Account?

bjblackmore

Hi,

I've got roughly £5,000 of savings, which until now has been spread around 3 different accounts, 1 Halifax regular saver @ 0.5% interest, 1 Halifax ISA @ 0.5% interest, and 1 Cahoot savings account @ 0.5% interest. However, my wife (basic tax rate) & I (just into the higher tax rate) have opened a Santander 1-2-3 current account, which gets 1% on balances over £1,000, 2% on £2,000 and 3% on £3,000.

As this money is kind of savings/kind of emergency money in case the boiler packs up, or we get car troubles, we need fairly quick access to it, but most of the time it'll just sit there, until we need it.

So, looking around, I've found a few instant access ISAs, with rates between 1.2%-2%. However by my calculations (using http://www.lcplc.co.uk/calculators/online-interest-calculator ) this still works out lower that putting it all in the 1-2-3 current account, which, £5,000 @ 3%, even if you take off the tax, and include the £2pm fee (which you only pay after 12 months, the first years £24 is refunded), still works out at around 2.4% interest. So why wouldn't we just put all our savings in a high interest current account, rather than an ISA, or other lower interest savings account?

The only thing that worries me about using a current account as a savings account, is we might not be able to differentiate between what’s there to spend on shopping, budgeted for going out/meals out etc, and what’s actually there as savings, so we’d end up eating into the savings. I prefer to have that clear line between a savings account, and a current account, so you know what’s in the savings can’t/shouldn’t be touched. However, I’m thinking, why not just open a second 1-2-3 current account with Santander? I think there is a minimum transfer in, each month, of about £1,000, but there is nothing stopping you from transferring back out, so our wages could go into one, and then the next day (minus monthly savings) out into the other current account.

Would this work, is this a good idea? Any advice or suggests would be greatly received!

Thanks

Ben

innovate

The current account idea is the right principle for your emergency fund. The 123 isn't your best bet for it though. Instead, you can both open 2 TSB Plus accounts. At £2,000 max each, that will give you room for £8,000. The AER is 5%, which makes 4% after BR tax, and 3% after HR tax.

Don't bother with cash ISAs unless you are determined to lose money to inflation.

bjblackmore

Thanks for the reply!

TSB Plus account looks interesting, but reading the account small print, it says:
"5.00% AER/4.89% gross variable interest on balances up to £2,000. Interest paid monthly. We do not pay interest on balances over £2,000".

So if we had £5,000 to save, and split it 50/50 between our 2 accounts, and we're going to add to that at £200-£300 per month (between us), interest wouldn't be earned on anything extra, would it, I'm assuming anything over £2,000 is 0% interest?

Where as Santander 1-2-3 says:
"3.00% AER/2.96% gross (variable) on your entire balance, once your balance is £3,000 or over (up to a maximum of £20,000). Interest rates will apply on the first £20,000 of your entire balance."

So interest would be earned on anything between £3,000-£20,000. Wouldn't that make the 1-2-3 account better? In a years time (if there are no emergencies), depending on what we can put away each month, we could potentially have £7,400-£8,600 with it all earning 3% (and in a single account), rather than 2x £2000 earning 4% & 5%, with the rest earning 0%?

Thanks again

Ben

innovate

I answered the question for £5,000 savings and showed you how you can put £8,000 into TSB Plus.

If you have more than £5000/£8000, you can firstly add up to 2 Club Lloyds accounts which pay 4% on balances between £4000 and £5000. So that's a total of £18,000 in accounts that pay better interest than the 123.

I am a big 123 fan myself but why settle for 3% interest if you can get 4 or 5?

jimjames

bjblackmore wrote: »

So interest would be earned on anything between £3,000-£20,000. Wouldn't that make the 1-2-3 account better? In a years time (if there are no emergencies), depending on what we can put away each month, we could potentially have £7,400-£8,600 with it all earning 3% (and in a single account), rather than 2x £2000 earning 4% & 5%, with the rest earning 0%?

As already explained between 2 of you you can get £8000 at 5%. Add in a Nationwide account and that rises to £13000 at 5%. Obviously if you are higher rate taxpayer then put money in your wife's name first to avoid paying more tax than needed.

So you can easily get the entire amount at 5% but if you'd prefer it all to be in one account then go for Santander and get 3% instead - entirely your choice - but most people would prefer the higher rate on a site like this.

ally18

Perhaps I have got it wrong but you would be earning your money quicker with the TSB accts?

You would have the £5k in 3 accts earning 4% from day one which is £200 over the year. Then you add your £300 each month up to the max of £8k over the 4 accts.

Or you would have the £5k in 123 act earning 2% from day one which is £100 over the year and then you would be adding up to £300 each month.

Its going to take you longer to get the interest in the 123 act but it is easier I guess, just the one act against the 4 accts with TSB.

(Sorry already explained by others)

eskbanker

bjblackmore wrote: »

However, I’m thinking, why not just open a second 1-2-3 current account with Santander? I think there is a minimum transfer in, each month, of about £1,000, but there is nothing stopping you from transferring back out, so our wages could go into one, and then the next day (minus monthly savings) out into the other current account.

Would this work, is this a good idea? Any advice or suggests would be greatly received!

Just to add to the other comments, if you do end up with two 123s, you can't satisfy the minimum funding requirement by direct transfer from one to the other, although you can achieve the same effect via a third account elsewhere!

bjblackmore

innovate wrote: »

I answered the question for £5,000 savings and showed you how you can put £8,000 into TSB Plus.

If you have more than £5000/£8000, you can firstly add up to 2 Club Lloyds accounts which pay 4% on balances between £4000 and £5000. So that's a total of £18,000 in accounts that pay better interest than the 123.

I am a big 123 fan myself but why settle for 3% interest if you can get 4 or 5?

Ah, OK, sorry I mis-read the 2 accounts each, initially read it as 2 accounts total, as in 1 for me & 1 for wife.

jimjames wrote: »

Add in a Nationwide account and that rises to £13000 at 5%.

5% from Nationwide is good, but looking at it, it's only for the 1st year "Interest on balances up to £2,500 (Introductory rate fixed for first 12 months)" after which it drops down to 1%, so you'd have to close the account and move again. The TSB & Santander accounts are on going.

Ref the TSB Classic Plus account, I've found 2 conflicting pages on their interest accounts:
http://www.tsb.co.uk/current_accounts/classic_and_classic_plus_accounts.asp says "5.00% AER/4.89% gross variable interest on balances up to £2,000. We do not pay interest on balances over £2,000" but...
http://www.tsb.co.uk/legal/current_accounts_legal/plus_important_information.asp says "We pay 'PLUS' interest only on the first £2,500 in your 'PLUS' account. We do not pay interest on anything over £2,500 in your account."

So is it £2,000 or £2,500? I'm assuming its the former, rather than latter!?

mel48rose

Sounds a bit misleading to me??

badger09

bjblackmore wrote: »

http://www.tsb.co.uk/legal/current_accounts_legal/plus_important_information.asp says "We pay 'PLUS' interest only on the first £2,500 in your 'PLUS' account. We do not pay interest on anything over £2,500 in your account."

So is it £2,000 or £2,500? I'm assuming its the former, rather than latter!?

The heading from that link reads:

PLUS Account - Important Information - No longer on sale

so need not concern you

mel48rose wrote: »

Sounds a bit misleading to me??

Not really

bjblackmore

eskbanker wrote: »

Just to add to the other comments, if you do end up with two 123s, you can't satisfy the minimum funding requirement by direct transfer from one to the other, although you can achieve the same effect via a third account elsewhere!

Oh right, so Sandander won't allow you to pay £1,500 wages into first 1-2-3 account, and then transfer £1000 out into another 1-2-3 account?

Having said that, the 1-2-3 account & TSB Plus account pages say "Fund the account with £500 a month." & "We ask that you put a minimum of £500 per month into your account" So I could transfer £1000 from cahoot into first 1-2-3 account, and £500 from cahoot into the second 1-2-3 account. The Lloyds club account requires £1,500 per month, so that might be harder to do.