1 year fixed savings account or money market fund

robaber

Hello

I have some cash I am saving for my child. I am unlikely to need it for around 8 years, but like to have access at least one a year. So I don't want to consider a 2 or 5 year fix, at this time. 

It was in a 1 year fixed savings account, which has just matured.

I am deciding between another 1 year fixed savings account (Around 4.75%) or my money market fund (current SONIA rate 4.95%). 

Although the money market fund is currently higher, as I don't need access and anticipating a reduction in interest rates during the next year, perhaps I should fix. 

Alternatively, rather than moving it around every year, I could put in a money market fund, for the next 8 years. 

I have also considered a bond fund or lower volutility fund, e.g. life strategy 20% equity fund. 

Any thoughts?

masonic

Money market fund could be a good lazy option as the return should at least be competitive. I'd think you could beat it by picking the best 1 year fix each year. Very likely the base rate will be dropped at the next MPC meeting and possibly again before the year is out.

VLS20 could be considered, but you'd have some risk towards the end of the period if you remained invested in it, so might need to change tack after a few years. It would probably be better than a 100% bond fund in terms of risk and return.

InvesterJones

You don't mention your tax situation, but if you're higher rate or above an alternative might be a gilt that matures in 7-8 years, say TG31. You'd lock in a relatively good rate but have the freedom to sell at any point (and if BoE rates decrease, selling early won't necessarily be a compromise)

robaber

InvesterJones said:

You don't mention your tax situation, but if you're higher rate or above an alternative might be a gilt that matures in 7-8 years, say TG31. You'd lock in a relatively good rate but have the freedom to sell at any point (and if BoE rates decrease, selling early won't necessarily be a compromise)

Hi 

Thanks for the advice. 

I am a higher rate tax payer. 

I don't know how to purchase an individual Gilt. Is this from the Bank of England Website?

masonic

Several online investment account providers offer Gilt trading (HL, Interactive Investor, iWeb, AJ Bell, etc)

Altior

A reasonable case for a bond ladder. 

artyboy

If you're a HR tax payer, wouldn't a JISA be more tax efficient, rather than holding it in your name?

cwep2

If you was to do Gilts, look at Yieldgimp.com you will see the Gilts in order of maturity, with a yield and an equivalent after 40% tax yield. The highlighted low coupon bonds (TN25, T26, T26A etc) are the ones you should be looking at.

For example the shortest dated one in TN25, maturing 31Jan2025, current mid-price is 98.97, the annual "coupon" is 0.25% (half of this is paid every 6 months) and the site shows Gross yield 4.3%, net yield 4.2% and 40% Gross equivalent 7.0%.

To break this down, if you buy this for a "clean price" of 98.97 and on 31st of January you will get 100.125 back (the £100 plus half the annual coupon). You will owe tax on the 0.125 coupon, but the rest of the gain is tax free, so in just over 3 months you get (100/98.97 - 1) = 1.04% tax free return plus a small bit of taxed 'interest'. Annualised (approx x4) that's where you get the 4.3% yield from, but given the gain (the 1.04% return in just over 3 months) is tax free this equates to a pre-tax yield of almost 7% (1.04% x 4 x 100/60). It's slightly more complex because the 6 monthly coupon between the last payment on 31st July has built up, and you actually pay what's called the "dirty price" of 98.97 +  the accrued coupon, so since we're approximately half way through the actual price will be more like 99.03. Then this is a mid-price and you will probably buy 0.01-0.03 above the mid price, and at iWeb I pay £5 dealing fee as well, which if you are doing £500 worth would make a big dent on the yield, but on thousands wouldn't be so bad. If you did £5k the dealing fees plus spread would still give you >>4% gross yield and >>6.5% effective yield for a 40% tax payer.

But this gives you an idea. Stick to the highlighted low coupon bonds, use HL, iWeb, AJ Bell etc.

robaber

artyboy said:

If you're a HR tax payer, wouldn't a JISA be more tax efficient, rather than holding it in your name?

Thanks. 

We do have a Junior S&S ISA for them, which is with Fidelity, as there are no platform fees. It has a small amount of money in global developed market index fund. We also have a Junior SIPP with them. 

However, we would like the bulk of the money we are saving for them to be in our name, so we have control over it. 

I use a cash ISA, S&S ISA and SIPP for my own money.

So this money will be within my personal savings allowance. 

I am thinking if continuing my 1 year fixed, each year, until I am closer to 18 then move to a Money Market Fund. 

In the end, I hope to have around 25% cash/ cash like and 75% Equity, for them. 

robaber

cwep2 said:

If you was to do Gilts, look at Yieldgimp.com you will see the Gilts in order of maturity, with a yield and an equivalent after 40% tax yield. The highlighted low coupon bonds (TN25, T26, T26A etc) are the ones you should be looking at.

For example the shortest dated one in TN25, maturing 31Jan2025, current mid-price is 98.97, the annual "coupon" is 0.25% (half of this is paid every 6 months) and the site shows Gross yield 4.3%, net yield 4.2% and 40% Gross equivalent 7.0%.

To break this down, if you buy this for a "clean price" of 98.97 and on 31st of January you will get 100.125 back (the £100 plus half the annual coupon). You will owe tax on the 0.125 coupon, but the rest of the gain is tax free, so in just over 3 months you get (100/98.97 - 1) = 1.04% tax free return plus a small bit of taxed 'interest'. Annualised (approx x4) that's where you get the 4.3% yield from, but given the gain (the 1.04% return in just over 3 months) is tax free this equates to a pre-tax yield of almost 7% (1.04% x 4 x 100/60). It's slightly more complex because the 6 monthly coupon between the last payment on 31st July has built up, and you actually pay what's called the "dirty price" of 98.97 +  the accrued coupon, so since we're approximately half way through the actual price will be more like 99.03. Then this is a mid-price and you will probably buy 0.01-0.03 above the mid price, and at iWeb I pay £5 dealing fee as well, which if you are doing £500 worth would make a big dent on the yield, but on thousands wouldn't be so bad. If you did £5k the dealing fees plus spread would still give you >>4% gross yield and >>6.5% effective yield for a 40% tax payer.

But this gives you an idea. Stick to the highlighted low coupon bonds, use HL, iWeb, AJ Bell etc.

Thank you. 

Why does being a higher rate tax payer effect my yield from a Gilt?

Dazed_and_C0nfused

robaber said:

artyboy said:

If you're a HR tax payer, wouldn't a JISA be more tax efficient, rather than holding it in your name?

Thanks. 

We do have a Junior S&S ISA for them, which is with Fidelity, as there are no platform fees. It has a small amount of money in global developed market index fund. We also have a Junior SIPP with them. 

However, we would like the bulk of the money we are saving for them to be in our name, so we have control over it. 

I use a cash ISA, S&S ISA and SIPP for my own money.

So this money will be within my personal savings allowance. 

I am thinking if continuing my 1 year fixed, each year, until I am closer to 18 then move to a Money Market Fund. 

In the end, I hope to have around 25% cash/ cash like and 75% Equity, for them. 

Will it increase any High Income Child Benefit Charge payable?  Or mean a High Income Child Benefit Charge becomes payable as a result of the additional taxable income?