Dilemma on where best to spend savings

itscatchingup

Hi,

My dilemma is a privileged one, but one for my family nonetheless, and any comment is appreciated.

I have around £95K in savings (from an inheritance), 30k of which is in an ISA and the remaining in a high interest account at 5% which is paid monthly. I get around £350 monthly in interest, which I leave to compound and I put in around £500 per month on top. I am a company owner and high rate taxpayer paying HMRC in advance (which is a real pain to manage!). I am not the most financially astute, but I am cautious.

I have a £100k mortgage (13 years remaining term at around £830 per month) on which I have recently remortgaged to 4.1% and made a lump sum payment at the same time. I can pay 10% capital per year.

As I'm the cautious type and am most comfortable having easy access to cash, I've held off on using the savings to pay the mortgage down, but I'm also uncomfortable having so much money in the bank (boo hoo I know :-).

My question is, am I being stupid in keeping the money in the bank to gain interest, or would it be better to take most of it and pay down the mortgage given the interest rate on it is lower than the interest on the savings?

Thank you.

kempiejon

itscatchingup said:

My question is, am I being stupid in keeping the money in the bank to gain interest, or would it be better to take most of it and pay down the mortgage given the interest rate on it is lower than the interest on the savings?

Thank you.

Well if your mortgage is 4.1% and your savings are 5% it's clearly making you money. However you;ll surely have a tax bill wiping it all out and more. 

I have a mortgage elsewhere I have enough invested to clear it but I can make more than the mortgage currently costs me.
If you used it all to clear your mortgage you've be £800 per month better off.

Mark_d

Sorry to be blunt but yes you are being stupid.  The £65k in your 5% account is earning less than what you would save in mortgage interest by making overpayments, because any interest your earn is taxed.

If you want to be over cautious, then first priortity should be overpayments on your mortgage.  Next I'd recommend maxxing out your cash ISA and Premium Bonds.

carly

Have you considered premium bonds ?  Not always the highest return but solid and tax free income on your winnings.

born_again

Can you add more to ISA to cut down on amount of tax paid on interest?

Not sure just how much tax you will be paying on the 5% account interest, But it might be better to pay some of the mortgage off to reduce your tax burden.

saajan_12

Need further information - please see comments in line. 

The two key things you don't mention is investment (though sounds like you may not be comfortable with that) and pension. How much do you have and how much do you regularly contribute? While not easy access right now, a pension means you'll have a safety net in later years. 

From the options you mention, I'd max out the options in this order: (1) ISA provided the rate is > 5%, (2) pay off mortgage saving 4.1% interest (3) high interest, effecitvely earning 3% interest after tax.
Note the allowances mean you'll still end up with a pretty large cushion out of 95k. Then next year, take money from the high interest savings and distribute it again among (1) and (2) as far as the allowances permit. REconsider when the easy access savings gets to 2-3 months expenses worth. 

itscatchingup said:

Hi,

My dilemma is a privileged one, but one for my family nonetheless, and any comment is appreciated.

I have around £95K in savings (from an inheritance), 30k of which is in an ISA and the remaining in a high interest account at 5% which is paid monthly. - what rate is the ISA, and how much have you put in this tax year? 
I get around £350 monthly in interest, which I leave to compound and I put in around £500 per month on top. I am a company owner and high rate taxpayer paying HMRC in advance (which is a real pain to manage!). I am not the most financially astute, but I am cautious. - okay, so you're effectively earning 3% interest net of tax on most of the non-isa interest (after a £500 allowance)

I have a £100k mortgage (13 years remaining term at around £830 per month) on which I have recently remortgaged to 4.1% and made a lump sum payment at the same time. I can pay 10% capital per year.- how much was the lump sum this year (per the mortgage anniversaries)? If you have room, this would be better to pay off than the non-isa savings, strictly on the numbers, but that assumes you won't need the money from a cash flow perspective. 

As I'm the cautious type and am most comfortable having easy access to cash, I've held off on using the savings to pay the mortgage down, but I'm also uncomfortable having so much money in the bank (boo hoo I know :-).- well exactly that's the downside, but 95k is a large cushion, personally I would still be comfortable with something smaller. 

My question is, am I being stupid in keeping the money in the bank to gain interest, or would it be better to take most of it and pay down the mortgage given the interest rate on it is lower than the interest on the savings?

Thank you.

itscatchingup

saajan_12 said:

Need further information - please see comments in line. 

The two key things you don't mention is investment (though sounds like you may not be comfortable with that) and pension. How much do you have and how much do you regularly contribute? While not easy access right now, a pension means you'll have a safety net in later years. 

From the options you mention, I'd max out the options in this order: (1) ISA provided the rate is > 5%, (2) pay off mortgage saving 4.1% interest (3) high interest, effecitvely earning 3% interest after tax.
Note the allowances mean you'll still end up with a pretty large cushion out of 95k. Then next year, take money from the high interest savings and distribute it again among (1) and (2) as far as the allowances permit. REconsider when the easy access savings gets to 2-3 months expenses worth. 

itscatchingup said:

Hi,

My dilemma is a privileged one, but one for my family nonetheless, and any comment is appreciated.

I have around £95K in savings (from an inheritance), 30k of which is in an ISA and the remaining in a high interest account at 5% which is paid monthly. - what rate is the ISA, and how much have you put in this tax year? 
I get around £350 monthly in interest, which I leave to compound and I put in around £500 per month on top. I am a company owner and high rate taxpayer paying HMRC in advance (which is a real pain to manage!). I am not the most financially astute, but I am cautious. - okay, so you're effectively earning 3% interest net of tax on most of the non-isa interest (after a £500 allowance)

I have a £100k mortgage (13 years remaining term at around £830 per month) on which I have recently remortgaged to 4.1% and made a lump sum payment at the same time. I can pay 10% capital per year.- how much was the lump sum this year (per the mortgage anniversaries)? If you have room, this would be better to pay off than the non-isa savings, strictly on the numbers, but that assumes you won't need the money from a cash flow perspective. 

As I'm the cautious type and am most comfortable having easy access to cash, I've held off on using the savings to pay the mortgage down, but I'm also uncomfortable having so much money in the bank (boo hoo I know :-).- well exactly that's the downside, but 95k is a large cushion, personally I would still be comfortable with something smaller. 

My question is, am I being stupid in keeping the money in the bank to gain interest, or would it be better to take most of it and pay down the mortgage given the interest rate on it is lower than the interest on the savings?

Thank you.

ISA rate is 5.1% and I've maxed it out for this year.
Lump sum on remortgage was £12k.

I do want a significant cash sum in hard in case of necessity, but I also want my money to work for me and help increase my disposable income.

There are some great suggestions I hadn't considered here, especially around the loss of interest to tax. Thanks to all who commented. I think I will start paying down the mortgage maxing our the 10% each year until it's gone...

LadyWithAPlan

Premium bonds are also useful as a HR tax payer 
plus I’d consider adding extra to your SIPP to maximise that tax break especially as a HR tax payer 
maybe do it in % 
so 25% etc to isa/Op/sipp/premium
bond/