First time saver advice

kronk83

Hello,

Last year I opened a Barclays cash ISA and over the course of the year reached the limit of just under £6000, this money is currently still earning 1.29% interest.

On top of this I should be able to save an additional £800 a month each month.

My goal is to eventually save up enough money to put down a deposit on a house so the I won't need to touch the money for 5 - 10 years.

I've done a fair amount of research on my own and just want some feedback from more experienced folk on how best I should invest my money.

My plan at the moment is as follows; transfer my last year ISA into one that pays a better rate of interest, probably a 3+ year fixed interest cash ISA, the best I've seen so far offer about 2.5%. I looked into current accounts that seem to offer a higher rate of interest but I've recently moved into the higher tax bracket (only just) so I'm not sure if this would be a good option for me as I'd have to pay 40% tax on the interest.

I'd also open a Stocks and Shares ISA and pay the £800 a month into this, investing in a number of funds that are medium to high risk. I've not really done any research on which funds I want to invest in yet but the best providers I'm looking at at the moment are iweb (£25 account opening fee, plus £5 per transaction) and Fidelity (0.35% annual charge).

So I suppose I want any advice on the following:

Is it a good idea to keep my current savings of £6000 in a fixed rate long term Cash ISA?
Is it a good idea to invest my monthly savings in funds within a Stocks and Shares ISA?
Would re-investing £800/month result in high commission fees and so a provider who charge by the trade may not be my best option?
Am I correct in thinking that as a higher rate tax payer, current accounts won;t save me as much as a Cash ISA?
Any suggestions for good Cash ISAs that allow transfers in from previous year ISAs and/or good 2014/15 Stocks and Shares ISAs that would be good for me?

Apologies for so many questions, I've tried to do as much research as possible, but as a savings newb, it's all a bit daunting!

xylophone

Could you not pay sufficient into your pension to take you out of 40% tax?

colsten

Unless you are certain that you don't need your deposit money for 7-10 years, may be S&S ISAs aren't the right thing for you.

Have you looked into Regular Savings accounts for your £800/mth - £300/mth @ 6% into FD, £250/mth @ 4% into HSBC, £400/mth @4% into Club Lloyds Monthly Saver. These accounts are "rinse and repeat", i.e. you start a new one on maturity. You'll beat cash ISA rates even as a HR tax payer with these accounts, and you can dripfeed them from 3/4/5% current accounts.

kronk83

xylophone wrote: »

Could you not pay sufficient into your pension to take you out of 40% tax?

I'd never thought about that, my employer currently pays a very generous 15% into my pension and so I pay nothing, but if I just paid an additional 5% then that would take me out of the higher tax rate bracket.

bowlhead99

It will, if you've put 5% of your salary into pension for 10 years you will have deferred quite a big tax bill until you are of pensioner age and hopefully in a lower tax bracket. But the alternative would have been to receive £xxx per month towards your house deposit, saved or invested.

It's not clear what option will do you best in the long term because although you can see a nice tax 'saving', some of that saving is only a deferment (as the fact you are getting 15% from employer and likely a state pension means you won't necessarily be poverty line and zero tax in retirement). On paper it would still be a nice number saved, but you don't know what better house you could buy earlier or what better mortgage interest rate you could achieve if you had cash in your hand from those extra few thousands being saved or invested each year for the next decade, outside the pension lockup.

You can't have the pension money back until at least 55 (maybe 58 or more by the time you get there) so that is a factor, if the goal is saving for somewhere to live before you're that age. It's a pretty big commitment to lock it away, if your existing contributions from employer are not too bad and you don't get any more free money from them if you contribute more yourself. An equally valid thing to do would be to max out a S&S ISA and if you decide you don't need it for the house after all, contribute it to a pension in 10 years time and save your 40% out of that year's salary instead. This buys you a lot more flexibility.

Thinking of your S&S ISA options, £800 a month is a reasonable amount so if you were only paying £5pm dealing fee its not a lot of percentage. It's not ideal though, and particularly if you wanted to buy more than one fund a month, the fees would start to rack up a bit. You would be better off with a provider that was lower (or zero) on monthly transaction fees and just charged a percentage platform fee (0.35 is at the higher end, you could get 0.3% or 0.25% or 0.2% at places like TD or Charles Stanley or Youinvest). At least while the pot is small.

As to whether S&S is suitable for a house deposit, if you are thinking 5-10 years:

1) Call it 7 years ;
2) and then you are dripfeeding a monthly amount, probably increasing over time as you get payrises with inflation or promotions ;
3) so slightly more of your money is going in later rather than evenly spaced ;
4) and even if it were evenly spaced, over a 7 year dripfeed cycle your money is only invested, on average, for 3 point something years.

So with weighting the contributions to 'more later' which is inevitably how your affordability will pan out, the money you put away is being invested somewhat less than the '3 point something years'. Because some of it has been invested for 7 years and some of it has been invested for just the last month.

Some people will tell you that 3ish years is not long enough for your stockmarket returns to be more than just a gamble. You might like to consider investing into S&S now but after a few years turn down the S&S contributions and turn up the cash ones, so you don't get blindsided by a market drop in year 6 and have to defer your purchase for a whole nother economic cycle.

kronk83

colsten wrote: »

Unless you are certain that you don't need your deposit money for 7-10 years, may be S&S ISAs aren't the right thing for you.

Have you looked into Regular Savings accounts for your £800/mth - £300/mth @ 6% into FD, £250/mth @ 4% into HSBC, £400/mth @4% into Club Lloyds Monthly Saver. These accounts are "rinse and repeat", i.e. you start a new one on maturity. You'll beat cash ISA rates even as a HR tax payer with these accounts, and you can dripfeed them from 3/4/5% current accounts.

Thanks - I'd not looked into regular savings account but I have now and given that I don't have a huge amount to invest at the moment I think this may be my best option.

Would you suggest withdrawing the money I have in my last years Cash ISA and re-investing this across a number of current accounts, or would withdrawing it from the tax free ISA wrapper not be a good idea? I'm currently earning 1.29% and the best rate I can find that accept transfers in is around 2.5% for a 3 year fixed rate ISA. So I'm not sure which would be my best option; leave it where it is, move it to a another Cash ISA provider or spread it across multiple current accounts? Any further advice greatly appreciated

Archi_Bald

You can just about squeeze £6,000 into 3 5% current accounts - 2 x TSB with £2,000 each, and a Nationwide FlexDirect taking £2,500. That would give you 3% net on £6,000 = £180, versus the 2.5% in the 3 year ISA = £150.

Given that the FlexDirect 5% runs for just 12 months and that opening and managing the current accounts takes some time, only you can decide whether the £30 is worth the hassle. On the other hand, current accounts are instant access so you could quickly take all the money out and put it into an ISA when/if better rates start to appear, hopefully, sometime next year.