Easy access & regular savings - working out the maths

Eskdale_investor

Bigwheels1111 said:

3k a month on Regular savers myself.

They are just starting to payout this year, Keep the cash in my Chip ISA.

Then fund regular savers on the First of the month, all except First Direct and Coventry.

Just over £1300 from regular savers in interest, not sure on Chip yet.

Do you not end up losing a fair chunk of this to tax as you go above the Personal Saving Allowance? 

Would an ISA not be more efficient above £500/£1000 depending on taxpayer rate?

masonic

Eskdale_investor said:

Bigwheels1111 said:

3k a month on Regular savers myself.

They are just starting to payout this year, Keep the cash in my Chip ISA.

Then fund regular savers on the First of the month, all except First Direct and Coventry.

Just over £1300 from regular savers in interest, not sure on Chip yet.

Do you not end up losing a fair chunk of this to tax as you go above the Personal Saving Allowance? 

Would an ISA not be more efficient above £500/£1000 depending on taxpayer rate?

Not if you have unused personal allowance and/or starter rate for savings. Also not if you have already used your ISA allowance.

Above all allowances and nil rate bands, basic rate tax is 20%, so after tax the First Direct regular saver @ 7% AER pays 5.6% net. So if you can find a cash ISA with a rate above that it would be worth considering. Higher rate taxpayers will obviously get more benefit from things like cash ISAs and premium bonds. People tend to choose a lower limit for the rate they'll accept from a regular saver. That will vary depending on your situation and willingness to jump through the necessary hoops.

surreysaver

allegro120 said:

surreysaver said:

I try to spread my regular savers out, so I have one or more maturing each month, and these then fund the following month's deposits into ongoing regular savers. Money sits in a flexible ISA when its not needed for regular savers, with the proviso that regular savers, after tax, pay at least the same % as the ISA.
And I have 0% debt on credit cards balancing the money in the regular savers 

Good strategy but must difficult to build.  Most of them come sporadically and some of them don't offer any attractive follow up products. I currently run 38 RSs and still have some months of next year uncovered.

It can be a pain, as this time last year I opened a load when the interest rates shot up, so I've got a load maturing at the moment!
Trying to spread them out again can risk missing the boat - I'm debating whether to leave opening the HSBC one for another month,. thinking its unlikely they'll be reducing their rate!

allegro120

surreysaver said:

allegro120 said:

surreysaver said:

I try to spread my regular savers out, so I have one or more maturing each month, and these then fund the following month's deposits into ongoing regular savers. Money sits in a flexible ISA when its not needed for regular savers, with the proviso that regular savers, after tax, pay at least the same % as the ISA.
And I have 0% debt on credit cards balancing the money in the regular savers 

Good strategy but must difficult to build.  Most of them come sporadically and some of them don't offer any attractive follow up products. I currently run 38 RSs and still have some months of next year uncovered.

It can be a pain, as this time last year I opened a load when the interest rates shot up, so I've got a load maturing at the moment!
Trying to spread them out again can risk missing the boat - I'm debating whether to leave opening the HSBC one for another month,. thinking its unlikely they'll be reducing their rate!

Historically HSBC don't change RS rates very often, so it is probably going to be available for a while, but you never know.  I've opened this account on the day it was launched, I find it easier to get things done asap. There's always an option to miss or reduce RS payments in the event of running out of float.

Exodi

martyp said:

Hi all,

Please can someone help work out what is the best arrangement for best result.

For the last 12 months I paid £200 a month into a regular saver at 8% interest.
That money came from an easy access savings account at 4.65%

I worked out there would be about £84 interest from the 8% account but leaving it in the 4.65% easy access works out over £100.

So the 8% seems attractive but as it is smaller amounts going in gaining interest it seems better to just leave the money in the easy access account for the year?

I appreciate it's not a huge amount being saved but thinking the aim of a regular saver is just better compared to a current account paying no interest as such.

Many thanks

Sorry I don't agree with any of your numbers.

I make £200 paid monthly for 12 months at 8% interest to pay £104 in interest. Assuming you are talking about the Nationwide regular saver from last year that matures this month. I think they also communicated £104 in their illustrations also.

I don't know how you went wrong in your calculations, but in lieu of just using an online calculator, here's another way to think about it.

Every £200 you have in, earns (£200 * 0.08)/12 = £1.33 (recurring) in interest per month.

The first £200 you deposit will earn interest for 12 months, the second £200 you deposit will earn interest for 11 months, the third £200 you deposit will earn interest for 10 months, etc.

You can see here that adding 12+11+10+9+8+7+6+5+4+3+2+1 = 78 gives us how many months worth of interest we'll earn on our £200 blocks. 78*£1.33 (recurring) as returns £104. I'm not suggesting that's how you should work interest out, it's an example to help understand how it works better.

Likewise your 4.65% easy access account, I don't know when it pays interest, but assuming it pays interest monthly, you get 61.32 in interest for the same money (£200 deposited monthly).

I think you are making the age old mistake with Regular Savers of comparing £200 being invested monthly, to £2400 being held in a different account for an entire year.

With savings accounts it really is as simple as bigger number = better.

Unfortunately this misunderstanding with regular savers comes up time and time again.

To be honest I think it warrants someone writing a nice guide on it that could just be linked in response to these threads that seem to come up every week.

Bigwheels1111

Eskdale_investor said:

Bigwheels1111 said:

3k a month on Regular savers myself.

They are just starting to payout this year, Keep the cash in my Chip ISA.

Then fund regular savers on the First of the month, all except First Direct and Coventry.

Just over £1300 from regular savers in interest, not sure on Chip yet.

Do you not end up losing a fair chunk of this to tax as you go above the Personal Saving Allowance? 

Would an ISA not be more efficient above £500/£1000 depending on taxpayer rate?

On a low income, 4k.

I'm a carer so £18,570 - carers allowance £4,010 = £14,560 of interest tax free.

martyp

Exodi said:

martyp said:

Hi all,

Please can someone help work out what is the best arrangement for best result.

For the last 12 months I paid £200 a month into a regular saver at 8% interest.
That money came from an easy access savings account at 4.65%

I worked out there would be about £84 interest from the 8% account but leaving it in the 4.65% easy access works out over £100.

So the 8% seems attractive but as it is smaller amounts going in gaining interest it seems better to just leave the money in the easy access account for the year?

I appreciate it's not a huge amount being saved but thinking the aim of a regular saver is just better compared to a current account paying no interest as such.

Many thanks

Sorry I don't agree with any of your numbers.

I make £200 paid monthly for 12 months at 8% interest to pay £104 in interest. Assuming you are talking about the Nationwide regular saver from last year that matures this month. I think they also communicated £104 in their illustrations also.

I don't know how you went wrong in your calculations, but in lieu of just using an online calculator, here's another way to think about it.

Every £200 you have in, earns (£200 * 0.08)/12 = £1.33 (recurring) in interest per month.

The first £200 you deposit will earn interest for 12 months, the second £200 you deposit will earn interest for 11 months, the third £200 you deposit will earn interest for 10 months, etc.

You can see here that adding 12+11+10+9+8+7+6+5+4+3+2+1 = 78 gives us how many months worth of interest we'll earn on our £200 blocks. 78*£1.33 (recurring) as returns £104. I'm not suggesting that's how you should work interest out, it's an example to help understand how it works better.

Likewise your 4.65% easy access account, I don't know when it pays interest, but assuming it pays interest monthly, you get 61.32 in interest for the same money (£200 deposited monthly).

I think you are making the age old mistake with Regular Savers of comparing £200 being invested monthly, to £2400 being held in a different account for an entire year.

With savings accounts it really is as simple as bigger number = better.

Unfortunately this misunderstanding with regular savers comes up time and time again.

To be honest I think it warrants someone writing a nice guide on it that could just be linked in response to these threads that seem to come up every week.

That's a good account, thankyou. Yes it's the Nationwide one that's maturing on the 22nd of this month. I'll probably get their 6.5% one after.

Sorry I realised I'd put the interest for the 6.5% Nationwide RS (£84) as the 8% amount.

Natwest still seem to be holding out with 6.17% so far and I have a Halifax regular saver on 5.5% fixed for a year.

I received a letter today to say the Cahoot EA is dropping from 5 20/5.08% to 5/4.89% on  18th November.

I did think it seemed most logical that a higher interest rate meant more money I think it was the incremental aspect of it I didn't get.

I'll check the MSE calculators again as I didn't see the comparison of EA or drip feeding a Regular saver on there before.

[Deleted User]

This is a massive simplification I know, but isn't the easiest calculation that the interest ends up being roughly half the rate of whatever you pay in to a RS over a 12 month period.

So if you pay 12 x 200 @ 6% its roughly £100.

If you paid in 12 x 500 @ 6% Bigwheels1111 said:

Eskdale_investor said:

Bigwheels1111 said:

3k a month on Regular savers myself.

They are just starting to payout this year, Keep the cash in my Chip ISA.

Then fund regular savers on the First of the month, all except First Direct and Coventry.

Just over £1300 from regular savers in interest, not sure on Chip yet.

Do you not end up losing a fair chunk of this to tax as you go above the Personal Saving Allowance? 

Would an ISA not be more efficient above £500/£1000 depending on taxpayer rate?

On a low income, 4k.

I'm a carer so £18,570 - carers allowance £4,010 = £14,560 of interest tax free.

Is that pure interest? I'm about to be in an identical situation. Its not £14,560 of savings before its taxed?

eskbanker

[Deleted User] said:

This is a massive simplification I know, but isn't the easiest calculation that the interest ends up being roughly half the rate of whatever you pay in to a RS over a 12 month period.

Anything referring to "half the rate" risks feeding the confusion and often indignation at the (unfounded) perception of being short-changed, so I always prefer to simplify it to (half the closing balance (i.e. the average over the year)) x (whole interest rate) rather than (whole closing balance) x (half the interest rate), although obviously they deliver the same answer mathematically.

Exodi

[Deleted User] said:

Bigwheels1111 said:

Eskdale_investor said:

Bigwheels1111 said:

3k a month on Regular savers myself.

They are just starting to payout this year, Keep the cash in my Chip ISA.

Then fund regular savers on the First of the month, all except First Direct and Coventry.

Just over £1300 from regular savers in interest, not sure on Chip yet.

Do you not end up losing a fair chunk of this to tax as you go above the Personal Saving Allowance? 

Would an ISA not be more efficient above £500/£1000 depending on taxpayer rate?

On a low income, 4k.

I'm a carer so £18,570 - carers allowance £4,010 = £14,560 of interest tax free.

Is that pure interest? I'm about to be in an identical situation. Its not £14,560 of savings before its taxed?

It's interest yes. So assuming you have no other income except £4010 carers allowance, if your savings were in accounts returning 5% interest per year, you'd need to exceed £291,200 in savings to go over your savings allowance (and thus start paying tax on interest).

£18,570 is the maximum savings allowance available, reduced by income: https://www.gov.uk/apply-tax-free-interest-on-savings