tax in savings/investments interest

olb81

I'm talking when you cant shield it with an ISA due to allowances… what are the options?

Some say premium bonds as its a tax shelter, however returns arent amazing.

A standard savings account say 4% minus tax is only going to return just over 3%.

So why not , if you are willing to have some risk, use a GIA and an index developed world or global fund? They average at least 8% I believe although can go up or down in the short term.

Lets say it got 6% over a year or two then its still higher than the savings account and even with tax on the profit made, it still beats a standard savings account and possibly even a cash ISA?

Am I missing something or if you dont mind some risk is a GIA investment a good option, until you can transfer it to a new ISA?

El_Torro

Yes, investments will almost always give a better return than savings over the long term. If you invest for 10 years or more this is pretty much always better than keeping the money in savings for those 10 years.

Savings have their place though. If you know you will need the money in a couple of years it's better to have the money in savings as there is a relatively high risk that investments will be worth less in 2 years than they are today.

Woodstok2000

https://forums.moneysavingexpert.com/discussion/6685799/tax-in-savings-investments-interest

2 years is a very short time for an investment - there's always the potential for a crash or long running downturn which could reduce your gains or even cause losses over that period. If you can afford to invest for the long term then a GIA will almost always be better than a savings account, but in the short term the risks are higher, which is why many people avoid them in those circumstances.

QrizB

Per OP's previous thread, they currently have £120k in a savings account paying 4%.

Unless I've missed some posts somewhere, they've not yet decided what to do with it. They might be buying a flat, might be adding it to a SIPP, or might be investing it in SSISAs so they can FIRE.

OP if you have a 2-3 year investment window you could make close to 5% at very low risk by holding low-coupon gilts in a GIA to maturity.

Exodi

I fear you may be trivialising the risks of investing (perhaps this was inevitable with the absolute bonkers bull run the market has been on this decade).

olb81

They average at least 8% I believe although can go up or down in the short term.

I think short term probably needs qualifying, as well as your time horizon.

For example, if you invested into a global index fund at the start of the financial crisis in 2008, it would take 6-8 years to return you to the same nominal value (still a loss once you factor in inflation). It would take 10 years for your money to have kept pace with inflation, with no real return.

Similar with the dotcom bubble. If you invested in QQQ in 2000 for example (Nasdaq-100), it would take 14 years to get back to the same nominal value. It would take about 17 years for your money to have kept pace with inflation, with no real return.

I think it would be hard to argue either of these could be defined as short term.

This also highlights the issue with using averages. I don't disagree with the numbers, but what you see when looking at stock performance is pretty slow and steady growth over the past few decades (with the occasional bust), but then absolutely explosive exponential growth this decade which hoists the averages up. Is it reasonable to expect that to continue over the long term? I don't know.

Many are nervous about significant capital commitments on AI, the reality that not everyone can win the AI-race (but they're all priced as winners while the race continues), falling global birth rates, significant concentration in US tech, etc. Some fear we are nearing the bust part of the stock market cycle in the near future. If the case, it is not unreasonable to expect that just like the past, it may take many, many years to recover new investments.

I guess my point is, I fear you are too overconfident on stock market returns and a bit too casual on the risks. It won't happen to me (until it does).

olb81

Lets say it got 6% over a year or two then its still higher than the savings account and even with tax on the profit made, it still beats a standard savings account and possibly even a cash ISA?

Or alternatively, the markets crash and your investments are down 30%.

olb81

i can afford to leave it longer if it went down as i dont have an immediate need to use the money. can i buy those GILTS through vanguard? I'm just fed up of my money being in nationwide paying 3.3% before tax!

Isthisforreal99

https://forums.moneysavingexpert.com/discussion/comment/82160048#Comment_82160048

Ignoring the investment side for now, you can get 5% + on those savings elsewhere.

Exodi

https://forums.moneysavingexpert.com/discussion/comment/82160048#Comment_82160048

I think the first thing to do would be to define your long term objectives.

Do you want to buy a flat? Do you want to retire early? You need to know the answer to these sorts of questions to make informed decisions.

That's not me being difficult. If you were planning to retire early, I might suggest whacking every penny possible of your employment income into your pension, and then subsidise your living expenses from savings. You will in effect be moving your £120k into your pension pots over a number of years, with all the generous benefits a pension provides. This is especially appealing if you are a higher rate tax payer, but are expecting to be a basic rate tax payer in retirement.

But if you were planning to buy a property in the medium term, then you probably would not want to tie up all of your savings in a pension.

At the moment I fear you can't see the wood for the trees and are fixated on your rate of return. We see it a lot in particular with tax efficiency (people become so obsessed in trying to save tax, they lose sight of the bigger picture and end up never enjoying the fruits of their labour).

dunstonh

I'm talking when you cant shield it with an ISA due to allowances… what are the options?

For investments, you have the following as the main options:

• Pension
• onshore bonds
• offshore bonds
• unwrapped holdings

There are others but they have be more advanced. Although direct holdings of gilts are increasingly becoming popular.

Lets say it got 6% over a year or two then its still higher than the savings account and even with tax on the profit made, it still beats a standard savings account and possibly even a cash ISA?

the long term average return is over the long term. You could get more than that or less than that or suffer a loss with a very short term of 2 years.

If you plan to spend all the money in 2 years time, then you should not be investing it.