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Does it make to put a chunk of money into a Cash ISA and the rest into a good high interest account or fixed rate bond?

04 February 2022

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Question by Adeola

Hello,

I’m very new to becoming financially savvy so thank you for all of the information on your website!
I have a lump sum amount of money in a savings account which has 0% interest. Majority of it will be used to save for a house but I am planning to use some of these savings to invest in bonds & shares and also as part of an emergency fund. Also to add a bit of context, I have more than the £20K ISA limit. So my questions are:

1. Does it make to put the main chunk of this into Cash ISA and the rest into a good high interest account or fixed rate bond? To avoid the further devaluing of my money in the current savings account.

2. I plan to put my emergency fund into an easy-access savings account too. Is it possible to have multiple savings accounts?

3. I currently have money invested in the NS&I premium bonds. Does it make sense to put some emergency funds in the bond?

Thank you in advance!


Answered by Boring Money

Hi Adeola

Congratulations on taking charge of your financial future!! I completely understand why you might want a better return on your money than your savings is offering, but before you start moving things about there are a few things to consider.

1. Your emergency fund should be kept in a cash-type account - like your savings or premium bonds so that you have access quickly when you need it and it holds it's value.

2. Depending on your age and when you plan to buy your home will depend on what you do with your house-buying money. If you are under 40 then a Lifetime ISA (LISA) will allow you to benefit from a government bonus scheme that rewards each £4000 you add to it with a bonus of £1000. You can only put £4000 per year in, but given that we are January now, you could do £4000 now and another £4000 in April. The LISA proceeds are paid direct to the solicitor as part of your house move process so you will need to have the money for moving costs / survey / mortgage fees etc. in a different type of account so that you have access to them when needed.

You are free to invest another £16,000 each year into another type of ISA and if you can find one paying a decent rate of interest - then a cash ISA could be an option, but to be honest the deals are few and far between. If you look up 'best buy cash ISAs' you'll find rates from 0.6% to 1.4% depending on how long you are able to tie your money up for. You'll need to keep moving your money at the end of the promotional rate, to find another good deal which can be time consuming.

Cash ISAs used to be very popular when interest rates were higher to get tax-free interest - but now that everyone gets an allowance for £500- £1000 tax-free interest per year - they offer few advantages over a standard savings account.

You can invest up to £50,000 in the premium bonds and for many people even one £25 win will far outstrip the interest on even the best buy savings accounts / cash ISAs - which is why they are currently very popular.

If you are not likely to buy a home for at least 5 years you could consider something like a stocks and shares ISA to maximise growth on your money BUT these are not suitable for short-term use as the value changes daily and cannot accurately be predicted over the shorter term.

If you have other long-term financial goals then it makes sense for most people to not 'waste' their ISA allowance on a cash ISA and to invest in a stocks and shares ISA using a suitable mix of funds for their risk appetite - but this should be for goals that are 5-10 years or longer into the future - over the long term growth is likely to grow at a rate higher than inflation and allow an opportunity to build a sizeable sum.

If you're not sure the best way forward then it would be worth speaking to a financial adviser who can provide individual advice.

Happy house-hunting

Claire

Answered by

Boring Money