Best "minimal risk" investment for 3 years

sgog
sgog Posts: 59
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edited 24 November 2023 at 10:05AM in Savings & investments
We have a fixed-rate mortgage for the next three years, paying very low rates compared to the current market situation.

Meanwhile, we received a large lump sum amount that I'd like to invest/save for the next three years while guaranteeing its value.

We are already fully utilising our ISA and savings allowances.

Among the different options, it seems that buying gilts directly would give the highest yield, as it is not taxed for capital gains (which makes it better than fixed term savings account or a gilt ETF).

So the questions are:
  1. Am I missing something, and there's actually a better way to invest the money without risking it? (of course, buying company bonds or shares could result in higher gains, but these are not guaranteed).
  2. Which gilts would you buy, assuming that I'll need the money in three years' time? One option is to buy GB00BL68HJ26 (which matures on Jan 26, almost a year ahead of time) and then put the money in savings until we need it. Another option would be to buy GB00BNNGP668, which matures right around when the money is needed (Oct 26), but has a higher coupon (which is taxed) and lower capital gains (which are tax free).
    A different idea would be to buy GB00BMBL1G81 (which matures in 2028), although that would mean selling it at a potential loss if the interest rates go up significantly,  so it's less interesting for me.
  3. Which platform would you be using to buy the gilts? I know that some platforms, such as HL allow buying gilts but at  a significant cost. iWeb was recommended here before as a lower-cost option. Is there a better way?

Thanks for reading and for any comments :smile:.

Edit: We are both higher tax rate payers. We will be using the full ISA allowance every year, the question is what to do with money that we have on top of that but will be needed to minimize the mortgage in 3 years.
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  • Emmia
    Emmia Posts: 2,925
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    edited 24 November 2023 at 6:16AM
    What do you mean by "savings allowances"

    Do you mean the £85k per person/banking licence protection?

    If so, you can just put your money in an account with a different provider e.g. if you have money in Barclays, you could open an account with HSBC and get another £85k per person/banking licence. 

    Keeping it as cash (earning interest) keeps it simple and low risk when you eventually want to access the money.

  • Since tax is mentioned a few times regarding gilts I suspect the OP means the personal savings allowance that allows up to £1000 of savings interest to be taxed at 0% depending on income tax band.

    So the tax situation would certainly appear to be relevant but OP doesn't explain their tax situation which would help :p

    Premium bonds is another option not mentioned so far.
  • I think some numbers may be helpful here:
    - what tax rates are you both on?
    - how much money are we actually talking?
    - how old are you? (as it could be worth to put more money to pension, especially if you're on 40% tax+)

    Other tax free option are Premium Bonds up to £50k each.
    Next April new ISA allowance starts so again £20k each.

    And if you're on 20% tax, then best saving account of 6% even after tax gives you 4.8% so that's not that bad.
  • wmb194
    wmb194 Posts: 3,092
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    edited 24 November 2023 at 10:15AM
    sgog said:
    We have a fixed-rate mortgage for the next three years, paying very low rates compared to the current market situation.

    Meanwhile, we received a large lump sum amount that I'd like to invest/save for the next three years while guaranteeing its value.

    We are already fully utilising our ISA and savings allowances.

    Among the different options, it seems that buying gilts directly would give the highest yield, as it is not taxed for capital gains (which makes it better than fixed term savings account or a gilt ETF).

    So the questions are:
    1. Am I missing something, and there's actually a better way to invest the money without risking it? (of course, buying company bonds or shares could result in higher gains, but these are not guaranteed).
    2. Which gilts would you buy, assuming that I'll need the money in three years' time? One option is to buy GB00BL68HJ26 (which matures on Jan 26, almost a year ahead of time) and then put the money in savings until we need it. Another option would be to buy GB00BNNGP668, which matures right around when the money is needed (Oct 26), but has a higher coupon (which is taxed) and lower capital gains (which are tax free).
      A different idea would be to buy GB00BMBL1G81 (which matures in 2028), although that would mean selling it at a potential loss if the interest rates go up significantly,  so it's less interesting for me.
    3. Which platform would you be using to buy the gilts? I know that some platforms, such as HL allow buying gilts but at  a significant cost. iWeb was recommended here before as a lower-cost option. Is there a better way?

    Thanks for reading and for any comments :smile:.
    It sounds like you've looked into it and understand the issues but you haven't told us your tax rate; if 40% do the gilt thing and use iWeb. £5 per trade and no holding costs. If 20% then it's marginal between gilts and the best three year savings bond at 5.5% gross / 4.4% net of 20%. Edit: if 20% the 0% PSA might tip the balance towards savings accounts.

    https://moneyfactscompare.co.uk/savings-accounts/3-year-fixed-rate-bonds/?quick-links-first=false#

    When referring to gilts it's easier to use refer them by their tickers and possibly yields and dates. You're referring to T26 0.125% 30/01/26, T26A 0.375% 22/10/26 and TN28 0.125% 22/10/28 respectively.

    Looks like there's barely anything in it between T26 and T26A - did mistake T26A for TG26 in your comment? If the maturity of T26A would cut it very fine for when you need the money then I wouldn't go for that anxiety inducing option. In theory, all other things equal, TN28 should increase in price as it approaches maturity but I don't think it would work in your minimal risk strategy.

    https://www.yieldgimp.com/




  • sgog
    sgog Posts: 59
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    Emmia said:
    What do you mean by "savings allowances"

    Do you mean the £85k per person/banking licence protection?

    If so, you can just put your money in an account with a different provider e.g. if you have money in Barclays, you could open an account with HSBC and get another £85k per person/banking licence. 

    Keeping it as cash (earning interest) keeps it simple and low risk when you eventually want to access the money.

    Thanks, Emmia.

    Aren't gilts that are held to maturity as good as cash or even better (assuming that by interest earning cash you mean an FSCS guaranteed savings account)?

    The question is what would earn the highest net (after taxes) yield.
  • sgog
    sgog Posts: 59
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    Since tax is mentioned a few times regarding gilts I suspect the OP means the personal savings allowance that allows up to £1000 of savings interest to be taxed at 0% depending on income tax band.

    So the tax situation would certainly appear to be relevant but OP doesn't explain their tax situation which would help :p

    Premium bonds is another option not mentioned so far.
    Thanks, InvesterJones!

    We are both higher rate payers (edited the question to have this noted).

    Premium bonds are fine in terms of safety, but their yield is not guaranteed and seems lower than the above-mentioned gilts?
  • sgog
    sgog Posts: 59
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    I think some numbers may be helpful here:
    - what tax rates are you both on?
    - how much money are we actually talking?
    - how old are you? (as it could be worth to put more money to pension, especially if you're on 40% tax+)

    Other tax free option are Premium Bonds up to £50k each.
    Next April new ISA allowance starts so again £20k each.

    And if you're on 20% tax, then best saving account of 6% even after tax gives you 4.8% so that's not that bad.
    Thanks, Newbie_John.
    We are both higher tax rate payers, and we're talking about upwards of £200k.
    (6% gross would give 3.6% net interest. Which is fine but not great  :))


    We plan to fully utilise the ISA allowances, but there would still be extra money that we want to earn interest on.

    Premium bonds are fine in terms of safety, but their yield is not guaranteed and seems lower than the above-mentioned gilts?



  • Emmia
    Emmia Posts: 2,925
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    sgog said:
    Emmia said:
    What do you mean by "savings allowances"

    Do you mean the £85k per person/banking licence protection?

    If so, you can just put your money in an account with a different provider e.g. if you have money in Barclays, you could open an account with HSBC and get another £85k per person/banking licence. 

    Keeping it as cash (earning interest) keeps it simple and low risk when you eventually want to access the money.

    Thanks, Emmia.

    Aren't gilts that are held to maturity as good as cash or even better (assuming that by interest earning cash you mean an FSCS guaranteed savings account)?

    The question is what would earn the highest net (after taxes) yield.
    Gilts is not something that I have any experience in, but which is better depends on the flexibility you want with the timing of access, vs the applicable interest rates vs tax liabilities.
  • Going by the figures in wmb194's table, T26 gets you an effective 4.38% for 26 months (assuming investment at the end of this month), and T26A 4.25% for 35 months. To get the former to be equivalent to the latter, you'd need a 9 month account or gilt paying, after any tax, (4.25*35-4.38*26)/9=3.87% - or 6.46% gross for a savings account subject to interest.

    I doubt you'll get such an account in 2026; you could of course buy the T26, then when that matures, buy T26A with the proceeds, to hold for just 9 months. But maybe with a short period like that, transaction costs may make a notable difference - has anyone worked them out in practice?
  • InvesterJones
    InvesterJones Posts: 621
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    edited 24 November 2023 at 10:56AM
    sgog said:
    Since tax is mentioned a few times regarding gilts I suspect the OP means the personal savings allowance that allows up to £1000 of savings interest to be taxed at 0% depending on income tax band.

    So the tax situation would certainly appear to be relevant but OP doesn't explain their tax situation which would help :p

    Premium bonds is another option not mentioned so far.
    Thanks, InvesterJones!

    We are both higher rate payers (edited the question to have this noted).

    Premium bonds are fine in terms of safety, but their yield is not guaranteed and seems lower than the above-mentioned gilts?

    You didn't ask for guaranteed returns originally, just lump sum value, if that's part of your requirements then premium bonds are definitely out, and your only options are fixed rate savings and gilts, the latter of which anyway do slightly beat median luck premium bonds as you point out.
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