Savings advice required

TDKTDK

lr1277 said:

Another thing to be mindful of is tax, how the interest is reported to HMRC and whether the account holder will have access to this interest.

Is your friend liable to tax?

Whilst I know you have not mentioned fixed rate bonds that have a duration of more than a year, you have to be careful with these.

Say you find a fixed rate bond that pays 5% every year for 2 years. After the 1st year, the financial institution MAY reports to HMRC the account holderr has made so much interest, which is taxable. However the account holder cannot get hold of it. In the 2nd year, the financial institution again reports the interest gained, but at the end of the term, all the interest and principal are available. So if interest is due on the 1st year's interest it is not available to pay HMRC.

Monthly interest or yearly interest only matters if your friend is going to spend the monthly interest (assuming he receives it in a usable form i.e. into his current account). If your friend doesn't need the interest, they may as well get the interest yearly.

Yes they are liable to pax tax.

Interesting point re tax owing after first year yet interest not paid until mataurity - ie 2 year term.

Would monthly interest not be more lucrative as the interest paid each month would compound?

TDKTDK

DRS1 said:

Has your friend considered Gilts?  Like NS&I that is a loan to the Govt.

Here is a thread about one paying over 5%

5.375% Treasury Gilt 2056 — MoneySavingExpert Forum

Maybe worth a read.

It is not the sort of gilt to buy outside an ISA (because the coupon will be subject to income tax) but there are low coupon ones which may be better held outside an ISA.  The thing with low coupon gilts is that a lot of the return is gain (between the price you buy the gilt at and the price paid on maturity) and that gain is free from CGT.

A drawback is that you only get the known price (£1 for £1 nominal) on maturity; if you sell before then you may get more or less than you paid for it.  And obviously you want to check the clean price when you buy is less than £1 otherwise you make a loss on maturity.

Had not heard of these, no. Thank you. Just had a read.

TDKTDK

VXman said:

You do realise you will get taxed quite a bit on the interest on 600K of savings.

Indeed. They are open to hearing of other options.

DRS1

TDKTDK said:

VXman said:

You do realise you will get taxed quite a bit on the interest on 600K of savings.

Indeed. They are open to hearing of other options.

You should read the stuff on the main website.  Lots of info there.

For example there is this about savings income (without knowing more about your friend we can't know what's relevant and what is not)

How the starting rate for savings works - Money Saving Expert

Assuming they are UK resident then an ISA is an obvious thing to use to help out on the tax but with a limit of £20k pa it will take a while to get £600k into an ISA (less time if they are married and prepared to split the money with their spouse).

A pension is also something to think about but without knowing if they are employed and what pension arrangements they already have it is tricky to say more.

There are other things but you run the risk of letting the tax tail wag the dog with them.

And then there is investing instead of saving (not for everyone but with that sort of money something to consider)

The low coupon gilts thing is a sort of investing  but more comparable with saving in terms of returns.

lr1277

TDKTDK said:

lr1277 said:

Another thing to be mindful of is tax, how the interest is reported to HMRC and whether the account holder will have access to this interest.

Is your friend liable to tax?

Whilst I know you have not mentioned fixed rate bonds that have a duration of more than a year, you have to be careful with these.

Say you find a fixed rate bond that pays 5% every year for 2 years. After the 1st year, the financial institution MAY reports to HMRC the account holderr has made so much interest, which is taxable. However the account holder cannot get hold of it. In the 2nd year, the financial institution again reports the interest gained, but at the end of the term, all the interest and principal are available. So if interest is due on the 1st year's interest it is not available to pay HMRC.

Monthly interest or yearly interest only matters if your friend is going to spend the monthly interest (assuming he receives it in a usable form i.e. into his current account). If your friend doesn't need the interest, they may as well get the interest yearly.

Yes they are liable to pax tax.

Interesting point re tax owing after first year yet interest not paid until mataurity - ie 2 year term.

Would monthly interest not be more lucrative as the interest paid each month would compound?

I have instant access savings accounts paying interest monthly into my current account. In these situations, the interest rate is lower than for an account that pays the interest once a year. This is on the assumption that the interest is not recredited to the savings account. Should the interest stay in the savings account (even though it is paid monthly), then the AER will be the same as an account that pays the interest yearly.

This link for an easy access account with Skipton BS illustrates what I mean:

https://www.skipton.co.uk/savings/easy-access/easy-access-saver
Scroll down to: What is the interest rate

Here it shows if you have the interest paid monthly, the rate is 2.76% with an AER of 2.8%.

However if you are paid interest yearly, the interest rate and the AER are both 2.8%

That difference as I said above is if the interest is removed from the savings account, it is not there to be compounded and hence the lower rate. However if the interest stays in the account, then after a year the interest gained will be the same and hence the AER will be the same.

chrismevans

There are quite a few places where you could get a good rate on interest on your funds, but would try splitting the funds due to the FSCS limit. Most reputable banks and building societies have this covered, but we put ours in The Stafford Building Society Notice 180 account at 4.61% srbs.co.uk they are on Moneyfacts in the top 3 for savings rates. They are local to us though, so probably swung it for us.