We are moving from a London townhouse to a 700-year-old “forever home” in West Sussex. Our “new” home requires substantial renovations, so we are using capital from our existing property to finance the remedial works, which will take a year or so. During this time, we will have a large cash balance of more than £500,000 to draw on. Our question is how best to take advantage of the interest on this sum? We will also need to use the money to pay for a rental property to live in. This means we don’t want to lock the money away, as we will need to get through it within a year.
Jeannie Boyle, director and chartered financial planner at EQ Investors, says there are three key things to consider in this scenario: security of your capital, maximising the interest, and taxation.
The Financial Services Compensation Scheme (FSCS) protects customers when authorised financial services firms fail on deposits up to £85,000 per eligible person, per bank or building society. There is also protection for temporary high balances of up to £1m for a six-month period from which you would benefit.
It’s important to check whether your bank shares protections with another. For example, AA & Post Office accounts are both licensed through the Bank of Ireland UK, so avoid holding more than £170,000 as a couple between these three institutions.
It might be helpful to split the money into different pots depending on when you need it. There will be a sum that you need to pay your rent and support yourselves over the next three months. I suggest holding no more than this in your current account, which is likely to pay minimal interest.
If you have a good idea of when you will need to have lump sums available to pay for your renovation costs, you could use term accounts to maximise the interest being paid. If you are able to use a one-year fix, Charter Savings Bank is top of the best buy tables paying 2.01 per cent (be aware that best buys frequently change and can be withdrawn without notice). This is an improvement on six-month, rates which are about 1.5 per cent.
Close Brothers offers a 95-day notice account paying interest of 1.8 per cent and Secure Trust Bank offers 1.65 per cent on a 45-day notice account (Secure Trust Bank is owned by Arbuthnot Banking Group; Close Brothers operates under its own banking licence).
In general, the rates for tax-free cash Isas are very poor. Charter Savings Bank reduces its one-year term rate from 2.01 per cent to 1.44 per cent for its easy access cash Isa; if you are able to use your personal savings allowance to avoid tax on savings interest, you will almost certainly be better off not using an Isa.
Anyone with income under the higher-rate tax threshold (£50,000) has a personal savings allowance of £1,000. This reduces to £500 for higher rate taxpayers, while additional rate taxpayers pay tax on all of interest they earn.
If either one of you is a non earner, you could also make use of the 0 per cent starting rate for savings that applies to up to £5,000 of savings interest. This is available in full if your non-savings income is below the personal allowance of £12,500.
Premium Bonds are another option for those who pay tax on their savings. They are the UK’s biggest savings product and any money made is always tax-free. Just be aware of the odds and don’t bank on winning the jackpot.
James Connor, chief executive at wealth manager Connor Broadley, says when deciding the best temporary home for a large sum of cash there are a few factors to consider, including the interest rate, the level of protection available to savers and how easily you can access your money.
As you will need to draw these funds throughout the year, you are right to ignore accounts that pay a higher interest rate in exchange for reduced access, such as fixed-rate bonds.
With two house moves planned over the coming year, alongside a major renovation project, you need to consider the “hassle factor” of managing your funds and keeping your finances as straightforward as possible.
For a balance of £500,000, my first suggestion would be Income Bonds from National Savings & Investments (NS&I), which offer a variable interest rate of 1.15 per cent before tax, paid monthly, combined with immediate access to your funds with no notice or penalty.
Any deposit you place with NS&I is fully backed by HM Treasury, with no upper limit, which gives you peace of mind that 100 per cent of your money is protected and you benefit from holding all of your money in a single account.
If you wish to maximise the interest you receive, a good option is easy access savings accounts, which have minimal withdrawal restrictions. Virgin Money and the new Marcus account from Goldman Sachs advertise accounts paying annual interest of 1.5 per cent before tax.
It is worth checking the terms and conditions before opening an account. For example, the interest rate of the Marcus account includes a bonus of 0.15 per cent for the first 12 months only. This is not a concern if you spend the money over the coming year but would affect a long-term saver. Similarly, the Virgin Double Take E-Saver account allows only two withdrawals a year, so you would need to plan around this.
Finally, although interest is now generally paid without tax deducted, this may be subject to income tax depending on your circumstances.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to email@example.com
Our next question:
My husband and I have recently concluded our rather nasty divorce and a settlement has been finalised. That said, I’ve just discovered his brother seems to suddenly have a holiday home in Barbados — even though he has had an extremely tough time of it recently. I’ve done some digging and the holiday home looks like it is owned by a company and I am convinced my ex-husband is a beneficial owner. If my husband was hiding assets from me in the divorce process, through this property, is there any way I can get this taken into account in our divorce settlement?