Contractors' Questions: Where should I put my £20k savings?

Contractor’s Question: Is the projection of four interest rate cuts in 2025 (albeit reportedly now reduced to three cuts), the final nudge I should need to take £20k out of my savings account - paying a dwindling 3.8% interest rate - and put it instead into a cash ISA, where 5% is achievable?

Or is there a better vehicle for my £20k that’s doing nothing (almost) in my savings account?

For context, I already have a SIPP that’s doing well. That’s even though my limited company which I work through isn’t, but the dicey fiscal outlook makes me think my warchest in the shape of cash reserves would be better off NOT at the mercy of the markets. Any relevant information welcome.

Expert’s Answer: There is always a place to hold some of your overall savings in cash, especially if you are considering this £20k to be your contingency monies.

When it comes to contingency money, the funds need to be accessible to you at any time that you need them.

Risk(s)

Therefore investing in anything with an element of risk could put the monies themselves at risk. After all, you may need to access the monies when the markets aren’t so favourable.

The downside to holding cash is that in the long term, it’s unlikely you will be able to achieve much growth with the funds -- and inflation will over the years erode the true value.

Considerations

You can continue to monitor the markets and review your savings to transfer your funds between the best savings rates available. You might even consider some 'notice accounts' or 'fixed-term rates' for a proportion. These accounts may provide a marginally higher rate compared to instant access but as their name suggests, they will come with restricted access to the monies -- perhaps no access during the fixed rate or a period of notice required to access.

Ideally if it's contingency money, cash reserves are held in readily available accounts.

The trick is three-fold and it’s this: hold what you need in cash, utilise the right savings accounts, then make use of your additional savings for the longer term -- with investments that provide more scope to outstrip inflation and meet your long-term objectives.

Contracting contingency monies, and the world not being on fire

In my opinion, the most prudent course of action for your ‘contracting contingency monies’ is to consider the choice of account and tax position, rather than just simply focusing on the rate of interest.

It’s a rate that, in all likelihood, isn’t going to set the world on fire!

What about a cash ISA?

Consider your options, such as cash ISAs which enable you to hold your reserves in an environment where at least the interest you do receive is not taxable.

Plus, there’s the added benefit now of the Flexible ISA, which allows you to take some funds out for a sudden emergency, and you are now able to replace them within the same tax year without affecting your ISA allowance.

As a reminder, your tax-free ISA allowance is £20,000 per tax year.

Another viable alternative is Premium Bonds. These can be a great alternative if you don’t have any remaining allowance available for your ISA, or you are making use of your ISA allowances for your long-term investments (which provide much more scope for growth and are a better use of the ISA wrapper and its efficiencies).

Where to get Premium Bonds?

Premium bonds are available through NS&I (National Savings & Investments).

They are not investment-backed so, in this sense, they are considered the same type of vehicle as a cash savings account. They are also Treasury-backed so, in this sense, they are considered risk-free.

With Premium Bonds, you can hold as little as £25.00 and up to £50,000 (- in total).

The uniqueness of Premium Bonds

Unlike a savings account where the typical interest rate fluctuates according to the movement of the Bank of England base rate, premium bonds are unique in that you receive a “win” rather than interest.

Each Premium Bond is given a unique number, and each month a draw is held and those Premium Bonds drawn can win cash returns between £25 and £1million.

The more Premium Bonds you hold, the more chances you have of “winning” each month. As the ‘win’ is not considered interest, the wins you have are tax-free and are not required to be part of your HMRC self-assessment.

Premium Bonds are instant access and can be cashed in any time you wish via your NS&I account. And the funds are paid into your nominated bank account.

Finally, the bigger picture…

It is vital to keep an eye on cash savings rates,  and not leave your funds dwindling in an account where rates are low, and ‘bonuses’ have dropped off. But I would say the choice of accounts, and your overall use of savings and investments is also part of the bigger picture. The Bank of England base rate (currently 4.75%) will continue to change, and it does appear that the movement will be downward and as part of a downward trend -- great news for mortgage holders not so great for savings.

The expert was Angela James, founder of Yolo Wealth.

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