Should I be splitting my savings between two accounts?

FlaatusGoat

I have about 70k split between two accounts and I'm just wondering if this is the right approach to maximise the growth of this money.

The Virgin Money Easy Access Cash ISA Exclusive Issue 2 (3.00%) has about about 10k in this one but it attracts only in theory £25 per month interest hardly stellar. Obviously I don't pay any tax and this is important. Technically I'm at the top of the basic tax threshold and take a penny more and I'm over this. 

The rest of my money is in another account that's easy access and offers about 2.72% obviously I benefit more from compound interest than the first account.

Any thoughts? Should I just lump all the money in the 2.72% account to benefit from compounding?

masonic

So you are considering taking money out of a 3% ISA to combine with money in a 2.72% savings account (not sure whether or not an ISA)? In any sense this would reduce your overall return, but especially so if it halves your personal savings allowance and puts you in the higher rate tax band.

The other aspect to consider is whether you'll approach the £85k FSCS limit in future years, which would necessitate a split for most people.

A final aspect is whether you are best served by keeping all of this money in cash accounts.

FlaatusGoat

masonic said:

So you are considering taking money out of a 3% ISA to combine with money in a 2.72% savings account (not sure whether or not an ISA)? In any sense this would reduce your overall return, but especially so if it halves your personal savings allowance and puts you in the higher rate tax band.

The other aspect to consider is whether you'll approach the £85k FSCS limit in future years, which would necessitate a split for most people.

A final aspect is whether you are best served by keeping all of this money in cash accounts.

Yes, I originally had all my money in the 2.72% account but had unused ISA allowance so moved some of it into the Virgin ISA (£10k) I need cash access unfortunately as I dip into it to top up my day to day spending account and I also anticipate buying next year. If I'm not losing out on compound interest than so be it.

Only last point is I don't think I've hit the tax-free interest amount (£1000?) so perhaps my tax band concerns are irrelevant?

masonic

FlaatusGoat said:

masonic said:

So you are considering taking money out of a 3% ISA to combine with money in a 2.72% savings account (not sure whether or not an ISA)? In any sense this would reduce your overall return, but especially so if it halves your personal savings allowance and puts you in the higher rate tax band.

The other aspect to consider is whether you'll approach the £85k FSCS limit in future years, which would necessitate a split for most people.

A final aspect is whether you are best served by keeping all of this money in cash accounts.

Yes, I originally had all my money in the 2.72% account but had unused ISA allowance so moved some of it into the Virgin ISA (£10k) I need cash access unfortunately as I dip into it to top up my day to day spending account and I also anticipate buying next year. If I'm not losing out on compound interest than so be it.

Only last point is I don't think I've hit the tax-free interest amount (£1000?) so perhaps my tax band concerns are irrelevant?

Compound interest is interest on interest. If your £25 per month ends up in an interest bearing account, then you are benefiting from compound interest. You benefit more from compound interest in the account with the highest interest rate, so you should be asking yourself why you don't have more in the 3% account. If your cash is being put towards a house purchase in the short term, then staying in cash is wholly appropriate.

Tax band concerns may still be relevant, as if your marginal rate of tax becomes 40%, then your personal savings allowance is reduced to only £500.

Band7

In order to work out whether 2.72% is the best place for the majority of your money, you need to know how much interest you already got and how much more you'll get before April 6 2023. The likelihood that you will bust, or will already have bust, your £1,000 savings allowance is quite high. If you are at the top of the BR earnings limit, the total interest may have made you an HR tax payer, so your savings allowance might only be £500. We can't know what all these numbers are, only you know.

You don't explain why you have only £10k in your ISA, as 3% tax free is obviously better than 2.72% taxable, regardless of whether your allowance is £500 or £1,000 or whether you need to pay any tax at all on your interest.

If you are hellbent to avoid paying tax on your savings interest, you should obviously max your ISA allowance to the limit. You might also be able to put £50k of your savings into Premium Bonds. These might give you a tax free return of around 2%, with an outside chance of winning a bigger price. If you are unlucky, you won't win anything but you would have achieved your goal to avoid some tax.

masonic

Band7 said:

The likelihood that you will bust, or will already have bust, your £1,000 savings allowance is quite high. If you are at the top of the BR earnings limit, the total interest may have made you an HR tax payer, so your savings allowance might only be £500. We can't know what all these numbers are, only you know.

For the avoidance of this important point being overlooked, it isn't just your earned income you need to consider when determining where you are with respect to tax thresholds, your non-ISA savings interest, even if tax free, is included in your total income for the year. Hopefully you knew this and included all relevant savings interest earned or to be earned in this tax year when you said "technically I'm at the top of the basic tax threshold and take a penny more and I'm over this".

surreysaver

If you are teetering on the edge of paying 40% tax, then earning more interest could push you over the edge. So you're better off with your money in the ISA for that reason, as well as the fact it pays more interest

AndyTh_2

Gross pension contributions also help pushing income below the higher rate threshold as well, and is usually a factor. Gift-aid donations as well.

jimjames

FlaatusGoat said:

The Virgin Money Easy Access Cash ISA Exclusive Issue 2 (3.00%) has about about 10k in this one but it attracts only in theory £25 per month interest hardly stellar.

Any thoughts? Should I just lump all the money in the 2.72% account to benefit from compounding?

Why don't you have the full £20k in the ISA as that's paying the highest rate of interest? You can also add another £20k in April. The amount you receive in pounds isn't relevant, it's the rate you need to compare.

Money_Mad

Large sums of cash are going to be decimated by high inflation.

Unless there is a specific reason to hold a lot of cash like buying a house etc then there may be better long term options

Eco_Miser

Money_Mad said:

Large sums of cash are going to be decimated by high inflation.

Unless there is a specific reason to hold a lot of cash like buying a house etc then there may be better long term options

Large sums not in cash are also going to be decimated by high inflation. They may be further decimated by drops in their nominal value (as in last year), or an increase in their nominal value may be sufficent to compensate for inflation.