1 year fixed savings account or money market fund

MK62

robaber said:

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?

It doesn't.......it's really telling you what interest rate you'd need to get in order for a deposit account to be equivalent to the return from the gilt.

wmb194

robaber said:

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?

*gilt (all lowercase). If it wasn't clear from cwep2's post, capital gains from gilts and other "qualifying" bonds are capital gains tax free so if you buy the right ones and you're a higher rate taxpayer they can be quite beneficial as it's hard to find normal, taxable accounts paying 6.5%+.

robaber

Dazed_and_C0nfused said:

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?

I don't think it will. 

But it is an interesting question. I hadn't considered this. 

Thanks

Dazed_and_C0nfused

robaber said:

Dazed_and_C0nfused said:

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?

I don't think it will. 

But it is an interesting question. I hadn't considered this. 

Thanks

Easily overlooked.

Just because the interest is taxed at 0% doesn't mean it's ignored for adjusted net income purposes.

Causes the same issue for people in tapered Personal Allowance territory.

robaber

If I decide not to buy an individual gilt.

Considering 8, 1 year fixed savings accounts over the next 8 years ( I want to have access at least once a year). 

Versus 

Vanguard Stirling Money Market Accumulation Fund, inside of my ISA. 

I wonder which is likely to perform better?

InvesterJones

We'll tell you in 8 years time

The answer depends on whether the fixed savings accounts lag or anticipate changes in the BoE rate (or more accurately, SONIA). If they lag any decreases and anticipate any increases then they'll return better. If they anticipate decreases and lag increases, they'll return worse. I would probably ask why an institution would feel the need to borrow (from you) at a higher rate than they could elsewhere - and I'd guess the answer would be along the lines of either a challenger bank or to solve some kind of issue they didn't want to go to the money markets about - so while I expect it's possible to find such banks, I'm not sure you can rely on it each time, and you'd have to be comfortable going with institutions you perhaps hadn't heard of.

OldScientist

robaber said:

If I decide not to buy an individual gilt.

Considering 8, 1 year fixed savings accounts over the next 8 years ( I want to have access at least once a year). 

Versus 

Vanguard Stirling Money Market Accumulation Fund, inside of my ISA. 

I wonder which is likely to perform better?

Some interesting analysis on the performance of best buy 1 year accounts compared to the SONIA (i.e., money market) rate at https://forums.moneysavingexpert.com/discussion/comment/81070296/#Comment_81070296  

which shows that over periods of 5 and 10 years 1 year fixed rate accounts had annualised returns of upwards of 50 bp better than the SONIA rate since 1995. Whether that will be the case over the next 8 years is not certain.

Provided the bank is FSCS protected (which I think all the best buys listed on this site are) then, up to £85k, your money is almost certainly safe. At least some of the challenger banks are borrowing to lend commercially hence the better rates they can offer (and, in the absence of 'bricks and mortar' lower overheads).