ISAs and Premium bonds - help!

rubysparkles

Hello everyone, 

Im tying myself in knots here and hoping someone can help me think through best course of action. 

I have 40k in savings that for the last year have sat in low interest accounts. I am thinking of splitting in the following ways to see grow. I also hope to save an additional £2000 per month this calendar year. I am too old to open a LISA. I am a higher rate tax payer. 

 My thoughts are: 

Park £20k into Premium Bonds (PB) which I also understand are tax free and with luck of the draw should rate at approx 4.65% growth. 

And: 

Open a 1 year fixed rate Cash ISA (considering accounts rated at between 4.25%-5%) this financial year and transfer the remaining 20k into that. 

And:

 in the new financial year in April, open a separate Cash ISA where I can transfer £1500 per month (total 18k of my 24/25 allowance)

And:  

open a Stocks and Shares ISA where with the remaining allowance for the year I can have a play and get my head around investing. 

My thinking is that I do need access to some liquid cash in case of emergencies so wary of transferring it all into a fixed ISA. But opening a fixed ISA this tax year provides another allowance in the next tax year at which point I assume I can add another chunk of cash at some point before the end of next financial year. As PBs and ISAs are both tax free accounts, it broadens my tax free allowance for the year. I am also new to investing. 

So I suppose my questions are: is this too convoluted? And should I consider maximising the Stocks and Shares allowance as having 2k to play with for the year perhaps is not enough? 

Thanks very much. 

ColdIron

rubysparkles said:

I am a higher rate tax payer.

If you are thinking of a S&S ISA is there any reason that a pension doesn't figure in your plans for some of that money? You would get tax relief for some or all of that 40% tax

rubysparkles

ColdIron said:

rubysparkles said:

I am a higher rate tax payer.

If you are thinking of a S&S ISA is there any reason that a pension doesn't figure in your plans for some of that money? You would get tax relief for some or all of that 40% tax

Thank you. Pensions are next on my list to sort out and get my head around! Im new to being a higher rate tax payer and working out how best to maximise this is a priority. I have a workplace pension that I pay into each month currently. Assuming you mean a separate pension-based account? 

ColdIron

rubysparkles said:

ColdIron said:

rubysparkles said:

I am a higher rate tax payer.

If you are thinking of a S&S ISA is there any reason that a pension doesn't figure in your plans for some of that money? You would get tax relief for some or all of that 40% tax

Thank you. Pensions are next on my list to sort out and get my head around! Im new to being a higher rate tax payer and working out how best to maximise this is a priority.

If you are not very far into HRT a pension contribution could take you out of it entirely

I have a workplace pension that I pay into each month currently. Assuming you mean a separate pension-based account?

Not necessarily. I assume your pension is a defined contribution one and not defined benefit

eskbanker

rubysparkles said:

Park £20k into Premium Bonds (PB) which I also understand are tax free and with luck of the draw should rate at approx 4.65% growth.

Depends what you mean by "with luck of the draw" but the median return (aka 'average luck') on £20K is 3.63% - the headline rate of 4.4% (reduced from 4.65% from next month) is distorted by the small number of large prizes:

https://premiumbondsprizes.com/detailed#20000

rubysparkles

ColdIron said:

rubysparkles said:

ColdIron said:

rubysparkles said:

I am a higher rate tax payer.

If you are thinking of a S&S ISA is there any reason that a pension doesn't figure in your plans for some of that money? You would get tax relief for some or all of that 40% tax

Thank you. Pensions are next on my list to sort out and get my head around! Im new to being a higher rate tax payer and working out how best to maximise this is a priority.

If you are not very far into HRT a pension contribution could take you out of it entirely

I have a workplace pension that I pay into each month currently. Assuming you mean a separate pension-based account?

Not necessarily. I assume your pension is a defined contribution one and not defined benefit

This is helpful thank you. So the idea is that topping up pension contributions via salary would benefit me by reducing the tax rate if I have understood that correctly? I will look into that. My pension is a defined contribution plan. 

EthicsGradient

Looking at just the prizes you stand a realistic chance of winning (up to and including £500), the Premium Bond yield is 4% - see https://www.lemonfool.co.uk/viewtopic.php?t=41434#p629736 , and you'd have to hold £20k in them for about 6 years to have a 50:50 chance of a £500 prize (without that, yield is 3.72% - still, for a higher rate payer, better than a taxed account).

Your £500 of interest on which you pay 0% tax equates to nearly £10,000 in the best non-ISA account (over 5%, with instant access) - it's probably worth keeping your emergency money in one of those next tax year (this year's allowance is, I guess, mostly used with the low interest ones you already have).

As ColdIron says, pensions are good for higher rate payers - if you're too old for a LISA, the minimum age to withdraw from a SIPP may not be that far off, so you might not be tying the money up for that long.

If you don't use a SIPP, you could consider opening the S&S ISA this tax year, and putting some of this year's £20k allowance into it, to give you a bit more "to play with" (though you might just use a "virtual portfolio" somewhere without real money if you want to get used to things. Unless you think you'll enjoy trying to pick stocks, though, I'd advise starting out with simple index trackers).

Getting at least £30k into either ISAs or a SIPP in this and the start of next tax year does seem a good idea, anyway.

ColdIron

rubysparkles said:

ColdIron said:

rubysparkles said:

ColdIron said:

rubysparkles said:

I am a higher rate tax payer.

If you are thinking of a S&S ISA is there any reason that a pension doesn't figure in your plans for some of that money? You would get tax relief for some or all of that 40% tax

Thank you. Pensions are next on my list to sort out and get my head around! Im new to being a higher rate tax payer and working out how best to maximise this is a priority.

If you are not very far into HRT a pension contribution could take you out of it entirely

I have a workplace pension that I pay into each month currently. Assuming you mean a separate pension-based account?

Not necessarily. I assume your pension is a defined contribution one and not defined benefit

This is helpful thank you. So the idea is that topping up pension contributions via salary would benefit me by reducing the tax rate if I have understood that correctly?

It wouldn't have to be with salary but broadly yes. You would get 20% tax automatically added by the provider and the other 20% by raising the higher rate threshold of £50,270 by the gross contribution so you would pay more 20% and less 40% (or maybe none)

eskbanker

EthicsGradient said:

Looking at just the prizes you stand a realistic chance of winning (up to and including £500), the Premium Bond yield is 4% - see https://www.lemonfool.co.uk/viewtopic.php?t=41434#p629736 , and you'd have to hold £20k in them for about 6 years to have a 50:50 chance of a £500 prize (without that, yield is 3.72% - still, for a higher rate payer, better than a taxed account).

It's a fair point that the longer PBs are held, the closer the return should be to the nominal rate, so yes, holding for six years will be better than one, but that Lemonfool thread (about £50K holdings) was from last year, prior to last month's announcement of the nominal rate drop applicable from March 2024.

Andreg

rubysparkles said:

This is helpful thank you. So the idea is that topping up pension contributions via salary would benefit me by reducing the tax rate if I have understood that correctly? I will look into that. My pension is a defined contribution plan. 

Correct, you will save income tax on any pension contributions, and if your employer allows you to make additional pension contributions by 'salary sacrifice' then you will also not suffer national insurance contributions on those contributions.

Albermarle

EthicsGradient said:

Looking at just the prizes you stand a realistic chance of winning (up to and including £500), the Premium Bond yield is 4% - see https://www.lemonfool.co.uk/viewtopic.php?t=41434#p629736 , and you'd have to hold £20k in them for about 6 years to have a 50:50 chance of a £500 prize (without that, yield is 3.72% - still, for a higher rate payer, better than a taxed account).

Your £500 of interest on which you pay 0% tax equates to nearly £10,000 in the best non-ISA account (over 5%, with instant access) - it's probably worth keeping your emergency money in one of those next tax year (this year's allowance is, I guess, mostly used with the low interest ones you already have).

As ColdIron says, pensions are good for higher rate payers - if you're too old for a LISA, the minimum age to withdraw from a SIPP may not be that far off, so you might not be tying the money up for that long.

If you don't use a SIPP, you could consider opening the S&S ISA this tax year, and putting some of this year's £20k allowance into it, to give you a bit more "to play with" (though you might just use a "virtual portfolio" somewhere without real money if you want to get used to things. Unless you think you'll enjoy trying to pick stocks, though, I'd advise starting out with simple index trackers).

Getting at least £30k into either ISAs or a SIPP in this and the start of next tax year does seem a good idea, anyway.

Good advice but worth noting that the OP has a workplace pension, so probably easier just to add more money to that, rather than opening a separate SIPP.

OP - 40% tax relief on pension contribution is a very generous tax benefit from the Government, so not to be sniffed at .