Pension vs ISA vs Offset Mortgage Savings

londonmania

I have a lump sum of c.£30K in old ISAs (pre 2014) and I need some advise on where to best invest/save this amount going forward.

Firstly, I don’t intend to use this years (2015/16) ISA allowance. Instead I hope to put payments into the mortgage Offset savings account which has 2.99% interest rate, given that new cash ISA accounts are offering a much lower rate (< 2%).
Note: I am higher rate tax payer and I want flexibility to withdraw the cash as needed in a years time.

Ques: Which is the better option and why, between the following options:

1) combine my last (2014/15) years ISA savings with all past years ISA savings (pre 2014) into a new ISA that allows transfers and leave it in there? I won't be using this years allowance.

OR

2) move all the ISA savings to date into the mortgage offset savings account.

OR

3) move all the ISA savings to date into my pensions (I have a personal and work pension) up to the yearly allowance and the remainder if any in an ISA that allows transfers in.

OR

4) move all the ISA savings to date into my pensions (I have a personal and work pension) up to the yearly allowance amount and the remainder if any is moved in the offset mortgage account.

thanks

pjread

If you *need* all the cash in 12 months time (what you've said above) that rules out pensions and makes anything other than probably keeping it in cash rather risky. So sounds like the offset (especially as no tax on the 'interest' that way)

bowlhead99

Unless you're over 55 you have to eliminate 3&4 because you want flexibility to withdraw the cash in a years time. Otherwise, the income tax relief would have been useful.

So the choice is between 1 and 2.

The case for 1: As you indicate you won't be using this year's ISA allowance perhaps we should infer that you won't be using the ISA allowance next year or the year after, either. Therefore it would seem sensible to withdraw the cash from the ISA and stash it in the offset savings account to give you an effective after tax return of 2.99%, better than any cash ISA that allows transfers in. If you would like to put it back in an ISA over later years at £15k a year, you could do that, so have not really compromised your ability to make long term tax savings on the stash. Also, if you were going to withdraw it to spend it as needed in a year then it would come out of its ISA wrapper anyway. So, seems no real harm done, and a good interest rate achieved, by following option 1.

The case for option 2 is that if you're able to max out your annual ISA limits next year and the next year and the next year ad infinitum and it turns out that you don't need to spend the cash in the next couple of years after all, then grabbing the 2.99% now (approx double the cash ISA rate) will compromise your earning capacity by losing the ISA protection on £30k which can never be topped back up.

Compounded over next 20 years plus, the value of the tax shield on £30k wrapped around cash or S&S would quite possibly be better than an extra 1.5% on the £30k via the mortgage offset account for a couple of years (which, over a couple of years, is probably worth less than £1k of extra interest over the ISA choice). So for someone looking for the long term at investments rather than a short term cash park, keeping the ISA wrapper (or converting to pension and investing there) would likely get a higher return than either cash ISA or mortgage offset.

But as you said you need to preserve the cash to draw as needed in a years time, we are not looking too the long term, leaving option 1 as the top choice for short term safe returns.

londonmania

Thanks for the feedback. I am under 40 and may need the cash next year for a flat deposit but hope to be able to use ISAs beyond that in the future.
At present it is a case of short term parking of the lump sum. This may change in the future if the flat situation doesn't progress in my favour.

Just to re check, in your response - in the first paragraph are you referring to Option 1 (all in ISA) or Option 2 (all in Offset)?.

I think you are suggesting that short term case the offset account is better?

If so, I am inclined to agree and wanted to know what the implications of losing out on the past ISA tax allowances were long term .

thanks

atush

I hope you have started pension savings of some kind though (esp your employer's)