Low interest rates on savings

[strung out]

Yes, all quite right. You’re betting on capitalism, basically, such is the safest bet there is. Either it wins and you get your blood money or it all fails and all investments become pointless anyway.

My caveat is that by investing globally you do introduce exchange rate risk. For that reason, my balance is always weighted towards the UK. I aim at about 50% UK and 50% RoW but right now it’s more like 60% UK.

For those who prefer a little more stability in their valuations at the cost of lower expected return, I came across this high income bond fund the other day:

interactive investor

www.ii.co.uk

About 95% of my investments are currently in equities, so I think I’m going to start introducing this as and when I have some spare to put away.

Good point about the currency risk. The only caveat I would add to your caveat is that by overweighting in the UK, you are potentially double risking based on your job, i.e. if the UK economy crashes, you're also more likely to be at risk of losing your job. If you're very secure in your career, that might not be an issue, but might be relevant for people in more precarious sectors.

If bimble does want to weight towards the UK, then the Vanguard Life Strategy funds are good. They're diversified funds with a UK weighting (around 50% I think), and there are various options for adding in bonds, such as the Lifestrategy 100 (100% equities), Lifestrategy 80 (80% equities and 20% bonds), Lifestrategy 60 (60% equities and 40% bonds) and so on. They're also set and forget for however long you want.

 

[Riklet]

It just depends how accessible you want your money. If you have a relatively small amount and might need access to it, it would be unwise to put it into stocks/shares or even an ISA that requires notice etc. Ideally you wouldnt put all your eggs in one basket either... but anything is better than 0.09%!

Generally stocks and shares ISA is a pretty solid bet, id agree with that, but still dont expect much. I also have a help to buy ISA which pays 1% but you can only pay in 200 a month, so this is good for saving up.... even if youre not going to buy. Oh and ive won a grand on the premium bonds before so will never bad mouth them personally

If you are thinking long term then tbh would be better to pay into a pension as much as possible and get the government top up, this works out as far better than most paltry savings rates.

 

[kabbes]

I do feel duty bound to point out that pensions, as good a saving vehicle as they undoubtedly are, are not actually tax free. It’s a misnomer to say that the government tops up your investment. Pensions actually defer the tax rather than avoid it, but this deferment might allow you to avoid it altogether depending on circumstances.

In a pension, you invest pre-tax, get investment return tax-free and then get taxed when you take the funds out. The key to the tax benefit is thus (a) tax-free investment return, (b) you can have a certain proportion tax-free when you take it out, and (c) you might be in a lower tax rate band when you’re retired compared with when you invested.

In an ISA, by contrast, you invest post-tax, get investment return tax-free and then have no tax when you take the money out (because it was already taxed). The key tax difference between an ISA and a pension, then, is your tax rate now versus your tax rate post-retirement.

The pension is a more tax efficient vehicle for almost everyone but the difference is not so great if, for example, you remain a basic rate tax payer the whole time.

 

[strung out]

I do feel duty bound to point out that pensions, as good a saving vehicle as they undoubtedly are, are not actually tax free. It’s a misnomer to say that the government tops up your investment. Pensions actually defer the tax rather than avoid it, but this deferment might allow you to avoid it altogether depending on circumstances.

In a pension, you invest pre-tax, get investment return tax-free and then get taxed when you take the funds out. The key to the tax benefit is thus (a) tax-free investment return, (b) you can have a certain proportion tax-free when you take it out, and (c) you might be in a lower tax rate band when you’re retired compared with when you invested.

In an ISA, by contrast, you invest post-tax, get investment return tax-free and then have no tax when you take the money out (because it was already taxed). The key tax difference between an ISA and a pension, then, is your tax rate now versus your tax rate post-retirement.

The pension is a more tax efficient vehicle for almost everyone but the difference is not so great if, for example, you remain a basic rate tax payer the whole time.

Indeed, if you're a basic rate taxpayer, have maxed out employer matching in your pension, don't have salary sacrifice available to you, and are under the age of 40, then you should open a Lifetime ISA instead. You get the same 25% top-up from the government, without having to pay tax at retirement. You can open a LISA up to the age of 40 and contribute up to the age of 50.

 

[Idaho]

I do feel duty bound to point out that pensions, as good a saving vehicle as they undoubtedly are, are not actually tax free. It’s a misnomer to say that the government tops up your investment. Pensions actually defer the tax rather than avoid it, but this deferment might allow you to avoid it altogether depending on circumstances.

In a pension, you invest pre-tax, get investment return tax-free and then get taxed when you take the funds out. The key to the tax benefit is thus (a) tax-free investment return, (b) you can have a certain proportion tax-free when you take it out, and (c) you might be in a lower tax rate band when you’re retired compared with when you invested.

In an ISA, by contrast, you invest post-tax, get investment return tax-free and then have no tax when you take the money out (because it was already taxed). The key tax difference between an ISA and a pension, then, is your tax rate now versus your tax rate post-retirement.

The pension is a more tax efficient vehicle for almost everyone but the difference is not so great if, for example, you remain a basic rate tax payer the whole time.

I'm interested in the idea that we should manage pensions more like ISAs in that we should invest net and be able to take the money tax free.

If the current regulations remain for the next 20 years, I could imagine a situation where I take the maximum tax free lump sum on retirement, and max it into ISAs each year.

 

[kabbes]

I'm interested in the idea that we should manage pensions more like ISAs in that we should invest net and be able to take the money tax free.

If the current regulations remain for the next 20 years, I could imagine a situation where I take the maximum tax free lump sum on retirement, and max it into ISAs each year.

I think the government has been quietly going that way for years. Maximum pension investment has been reducing (potentially, you can now be limited to £4K a year if you earn enough, which is <2% of income by the time you reach that ceiling) whilst ISA limits have been going up. I think motivation is on the government wanting its tax now rather than later, though.

 

[Elpenor]

I’ve got approx 160k (house sale proceeds which will hopefully be spent on a new house later in the year), and I’ve got allocated at moment:

Goldman Sachs Marcus 85k - 0.4% interest rate best rate available for instant access cash

premium bonds 39k - as safe as cash, may win nothing but average wins imply could get 1%

S&S isa 40k (from Tuesday when I top it up for new tax year) - currently sitting as cash as I’ve been too busy to pick funds but it will go into a mix of UK and RoW trackers / index funds.

Obviously the aim is to not have any less money than I started with and to get the money quickly when I am able to buy somewhere . But I’d like to give myself a chance of having made a little bit of money.

It feels like a lot of money - which of course it is - but it’s also not replaceable which makes it a scary prospect!

 

[Edie]

I’ve got approx 160k (house sale proceeds which will hopefully be spent on a new house later in the year), and I’ve got allocated at moment:

Goldman Sachs Marcus 85k - 0.4% interest rate best rate available for instant access cash

premium bonds 39k - as safe as cash, may win nothing but average wins imply could get 1%

S&S isa 40k (from Tuesday when I top it up for new tax year) - currently sitting as cash as I’ve been too busy to pick funds but it will go into a mix of UK and RoW trackers / index funds.

Obviously the aim is to not have any less money than I started with and to get the money quickly when I am able to buy somewhere . But I’d like to give myself a chance of having made a little bit of money.

It feels like a lot of money - which of course it is - but it’s also not replaceable which makes it a scary prospect!

Why are you bothering with premium bonds, with an average return of 1%?

 

[Puddy_Tat]

The pension is a more tax efficient vehicle for almost everyone but the difference is not so great if, for example, you remain a basic rate tax payer the whole time.

I'm not entirely convinced. on my crap 'defined contributions' pension, according to the bumf i get now and then, i'm going to need to live to be over 100 to show a profit on the deal...

 

[strung out]

Why are you bothering with premium bonds, with an average return of 1%?

I'm not Elpenor, but 1% is better than anything else you'll get without putting capital at risk. If he wants to buy a house next year, he'd be pretty stupid to put it all into stocks, only for the stock market to possibly take a dive at the precise point he needs it, and have to wait years for it to recover.

Premium bonds provide security, and the absolute best returns on cash savings at the moment.

 

[Edie]

I'm not Elpenor, but 1% is better than anything else you'll get without putting capital at risk. If he wants to buy a house next year, he'd be pretty stupid to put it all into stocks, only for the stock market to possibly take a dive at the precise point he needs it, and have to wait years for it to recover.

Premium bonds provide security, and the absolute best returns on cash savings at the moment.

Yeah fair enough. No one take financial advice off of me anyway, I’m a total amateur.

 

[teuchter]

It's a first world problem really, if you are lucky enough to have some savings to have to worry about what to do with them... but I hate all this stuff.

I'm reasonably competent at maths (and an obsessive researcher-bargain-hunter when it comes to purchasing 'normal' things) but for some reason when I start looking at financial stuff it gives me the fears, I feel like my brain doesn't want to engage with it and I put off making decisions.

But anyway

I have a big mortgage that I could pay off but have it invested instead, because my mortgage rate is only 1.5%. Now, I potentially need 3% pre-tax to beat that

Can you explain the maths that gets you from 1.5% to 3%?

For some years I've chosen to not pay any of a mortgage, because I've had one at quite a low interest rate, and I've found I can put money in savings accounts with higher or similar rates. Therefore I've taken the approach that I'm not really losing much, and it leaves the money "available" which for various reasons is good for me... including things to do with being self-employed and therefore it potentially being difficult to re-mortgage in the future if I needed something on an emergency type of basis.

This year it's a bit different; my mortgage is also around 1.5% while the best you can get out of a savings account is currently around 0.5%.

I attempt to quantify to myself how much per year it therefore "costs" me to choose to not pay off X proportion of the mortgage, which I say is 1.5%-0.5% = around 1% plus some extra complications that are something to do with tax, but give me a headache if I try to understand them.

Your "3% to beat 1.5%" suggests I'm probably underestimating the cost of that choice.

 

[Elpenor]

I'm not Elpenor, but 1% is better than anything else you'll get without putting capital at risk. If he wants to buy a house next year, he'd be pretty stupid to put it all into stocks, only for the stock market to possibly take a dive at the precise point he needs it, and have to wait years for it to recover.

Premium bonds provide security, and the absolute best returns on cash savings at the moment.

Exactly this. PB may win me a big or smaller prize, or more likely nothing. Quick access, totally safe. Given cash rates are low and I’ve got up to FSCS amount in Marcus, it seemed more fun than a cash savings account.

I’m prepared to risk 25% on the stock market via a careful selection of funds

I figure if I make 10% on 40k, the profit pays for the house moving costs, stamp duty etc. If I lose 10% on 40k, well it probably doesn’t change the type of house I buy.

 

[kabbes]

It's a first world problem really, if you are lucky enough to have some savings to have to worry about what to do with them... but I hate all this stuff.

I'm reasonably competent at maths (and an obsessive researcher-bargain-hunter when it comes to purchasing 'normal' things) but for some reason when I start looking at financial stuff it gives me the fears, I feel like my brain doesn't want to engage with it and I put off making decisions.

But anyway



Can you explain the maths that gets you from 1.5% to 3%?

For some years I've chosen to not pay any of a mortgage, because I've had one at quite a low interest rate, and I've found I can put money in savings accounts with higher or similar rates. Therefore I've taken the approach that I'm not really losing much, and it leaves the money "available" which for various reasons is good for me... including things to do with being self-employed and therefore it potentially being difficult to re-mortgage in the future if I needed something on an emergency type of basis.

This year it's a bit different; my mortgage is also around 1.5% while the best you can get out of a savings account is currently around 0.5%.

I attempt to quantify to myself how much per year it therefore "costs" me to choose to not pay off X proportion of the mortgage, which I say is 1.5%-0.5% = around 1% plus some extra complications that are something to do with tax, but give me a headache if I try to understand them.

Your "3% to beat 1.5%" suggests I'm probably underestimating the cost of that choice.

My marginal tax rate is about 50%. So for every £1 of mortgage interest I pay, I have to actually earn £2. Alternatively, for every £1 of mortgage interest I pay, I need to earn £2 of gross interest from savings.

E.g. suppose I take out a £100,000 mortgage at 1.5% and invest that money immediately in a 3% savings account. Each year, my mortgage interest costs me £1,500. My savings make me £3,000 but I then have to pay 50% of that back in tax, so I actually only receive £1,500 net. So my mortgage at 1.5% balances my savings at 3%.

(Of course, actual tax rates aren't 50% and there are other complications such as a certain amount of tax-free interest you're allowed and reduced tax on dividends but you get the idea, and it's not a bad rough calculation to use).

 

[teuchter]

My marginal tax rate is about 50%. So for every £1 of mortgage interest I pay, I have to actually earn £2. Alternatively, for every £1 of mortgage interest I pay, I need to earn £2 of gross interest from savings.

E.g. suppose I take out a £100,000 mortgage at 1.5% and invest that money immediately in a 3% savings account. Each year, my mortgage interest costs me £1,500. My savings make me £3,000 but I then have to pay 50% of that back in tax, so I actually only receive £1,500 net. So my mortgage at 1.5% balances my savings at 3%.

(Of course, actual tax rates aren't 50% and there are other complications such as a certain amount of tax-free interest you're allowed and reduced tax on dividends but you get the idea, and it's not a bad rough calculation to use).

Ah yes I see. It depends quite a lot on how much you earn.

So if your salary earnings were £16,000 then you would pay 0% tax on that £3000 = £0 and have £3000 at the end.

And if you earned £30,000 then you'd pay 20% on £2000 of the £3000 = £400 and have £2400 at the end.

But if you earned £160,000 you'd pay 45% tax on that £3000 = £1350 and have £1650 at the end.

Other way around... if you earn £16,000 you need 1.5% savings account to balance out the mortage.
If you earn £30,000 you actually are ok with about 1.6% or something
If you earn £160,000 you need something approaching 3% like you say.

But of course if you then have other savings, that affects your tax free allowance, and then you realise you need some kind of giant spreadsheet and break out into a cold sweat.

 

[kabbes]

That’s all correct except that the “cold sweat” should be replaced with “pleasant afternoon’s challenge”

 

[Teaboy]

Bollocks to it all. A covid mutation will have us all by the end of the year anyway. Spend it and have fun (during the brief fortnight period that fun isn't banned this summer).

 

[kabbes]

I kind of think of 40% (higher rate) as kind of like 50% for mental calcs, by the way, even though this is inaccurate. I am a maverick.

 

[wtfftw]

So. If I'm a nonemployed nontaxpayer forever and I'm shacked up with someone in a secure teaching job who is just creeping into higher tax (there goes our marriage incentive), I should be doing the investing and hoping his pension covers me?

 

[UnderOpenSky]

I do feel duty bound to point out that pensions, as good a saving vehicle as they undoubtedly are, are not actually tax free. It’s a misnomer to say that the government tops up your investment. Pensions actually defer the tax rather than avoid it, but this deferment might allow you to avoid it altogether depending on circumstances.

In a pension, you invest pre-tax, get investment return tax-free and then get taxed when you take the funds out. The key to the tax benefit is thus (a) tax-free investment return, (b) you can have a certain proportion tax-free when you take it out, and (c) you might be in a lower tax rate band when you’re retired compared with when you invested.

In an ISA, by contrast, you invest post-tax, get investment return tax-free and then have no tax when you take the money out (because it was already taxed). The key tax difference between an ISA and a pension, then, is your tax rate now versus your tax rate post-retirement.

The pension is a more tax efficient vehicle for almost everyone but the difference is not so great if, for example, you remain a basic rate tax payer the whole time.

Is it reasonable to think if you are a basic rate tax payer and can save a bit a tiny bit extra towards retirement that a pension is probably the best way to do it?

 

[teuchter]

That’s all correct except that the “cold sweat” should be replaced with “pleasant afternoon’s challenge”

I'll send you all my financial details yeah?

 

[Orang Utan]

By the way, I have now taught my kids both this (in fact now they’re way ahead of me). But it obviously didn’t occur to anyone at home or school when I was a kid or young adult to even mention how to save money. I had literally no idea until my late 30s (after divorce).

I didn’t even understand the basics of compounding (ie saving!!). (If you don’t this video is excellent):


I’ve now become certain that kids should be taught this stuff and even spoken to my lads mates about the importance of it. My one mantra used to be ‘don’t get in debt’. It’s now ‘don’t get in debt, and save regularly from the start’.

I don’t know this stuff and have never saved money ever.

 

[Edie]

I don’t know this stuff and have never saved money ever.

The best time to start was years ago, but the second best time is now! Xx

 

[Orang Utan]

The best time to start was years ago, but the second best time is now! Xx

Think I’ll just continue avoiding it tbh

 

[Edie]

Think I’ll just continue avoiding it tbh

Why?

 

[seeformiles]

We haven’t got much in the way of savings but sticking what we have in Premium Bonds has yielded way more than any bank interest account ever could in the last 5 years or so (works out about 4% on average)

 

[Buddy Bradley]

Wouldn't stocks be your best bet overall for long-term investment (subject to your attitude to risk)? The S&P 500 has averaged 13.6% over the last 10 years!

 

[Orang Utan]

Why?

I find it hard to understand as it’s not very interesting, even though i grant that it’s important

 

[bimble]

The paradox with passive funds is that they only work if most people are not invested in passive funds

If you tried to explain this to me would I have a greater than 3% chance of getting it?

 

[donkyboy]

We haven’t got much in the way of savings but sticking what we have in Premium Bonds has yielded way more than any bank interest account ever could in the last 5 years or so (works out about 4% on average)

how much do you win in the monthly draws?