Mouthy Money Your Questions Answered panelist Laura Suter answers a reader’s question about where to keep money for a house deposit and the value of Premium Bonds. 

Question: I’ve got £50,000 in Premium Bonds which my Granny gave to me. I’m planning on using the money to buy my first home in the next few years. Should I move them somewhere else or is it safest to leave them where they are?

Answer: A big thanks to your granny, that’s an amazing gift to be given and will go such a long way towards a first home. 

Let’s tackle Premium Bonds first. They are a fun option to gift someone, as you have the chance of making them a millionaire, but they aren’t the best for getting a decent return on your money.

Based on the average amount of luck you would get a 2.2% return, but lots of people win nothing. If you want to risk it you could keep your money there and hope for a decent pay out, but if you want a guaranteed return on your money you’ll need to look elsewhere.

People like Premium Bonds because they are safe and Government-backed, but as your savings are below the FSCS compensation limit of £85,000 you’ll be covered by a very similar guarantee. You just need to check that any other provider you move it to is covered by the scheme.

Your next option is a cash savings account. If you go down that route you’ll want to hunt out the top-paying account. According to Moneyfacts this is currently 2.85% for an easy-access savings account from Earl Shilton Building Society. That means in the next year your money will earn £1,425 in interest.

An alternative is locking your money up in a fixed-rate account, as you say that you don’t plan to use it in the next few years.

A two-year fixed rate account will pay 4.75% at the moment, boosting your annual return to £2,375. Or a one-year account will pay slightly less at 4.35%.

The downside of locking your money up is that you won’t benefit from any future interest rate rises from the Bank of England. You could split the money between easy-access and fixed-rate accounts to hedge your bets.

The third option is investing it. It depends when you think you’ll buy a property as to whether this is a viable option.

Generally, we say that investing should be for a minimum of five years, so if you want to buy before then it might not be for you. If you do decide to go down this route you could boost your returns, but just make sure you research the options and feel comfortable with the risk you’re taking. 

It’s a boring topic, but we need to talk about tax. Even with the interest you’ll earn on the easy-access account above, you’ll end up paying tax on your savings.

Basic-rate taxpayers can earn £1,000 from their savings tax free and higher-rate payers can earn £500. After that you pay your usual rate of income tax on your savings.

So, if you took the two-year fixed rate account above you’d lose £275 a year to tax if you’re a basic-rate taxpayer or £750 if you’re a higher-rate taxpayer. You will have avoided this issue until now as prizes from Premium Bonds are tax free.

The way to protect your money from tax is to put it into an ISA, either a cash one or an investment ISA, as money in these accounts is free of tax. Everyone has a £20,000 a year ISA allowance, so it will take you three years to move the money into an ISA, but it’s a good idea to start now if you haven’t used up this year’s allowance.

A great option if you plan to use this money for a house deposit is to put the money in a Lifetime ISA. This is a savings account intended for first-time buyers that gives a government bonus to any money you pay in.

You can put in up to £4,000 a year and the government will top it up by 25%. So if you pay in £4,000 you’ll get £1,000 – it’s an unbeatable return. There are cash and investment Lifetime ISAs, so you can pick whichever works for you.

Just be aware that there are some restrictions on the account. The big ones are that you must be 18 to 40 years old to open the account, you can only buy a property worth up to £450,000 and you must have it open for a year before you use it for a deposit.

You also shouldn’t withdraw the money for any other reason, aside from using it as a deposit or as retirement savings, as you’ll face an exit fee for doing so.

I think a good option is to do a mixture of all of these. Some in a Lifetime ISA, some in a standard cash ISA, some in a fixed-rate account and the remainder in an easy-access cash account (unless you go down the investing route).

If you end up with multiple accounts just make a note of when the interest rates on them are due to fall so you can hunt around for the next best deal to ensure your money is still working as hard as possible for you.

Laura Suter is head of personal finance at AJ Bell.

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor.

Mouthy Money Your Question Answered compiled by Rebecca Goodman

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Mouthy Money Your Questions Answered panelist Laura Suter answers a reader’s question about finding the most tax-efficient home for their children’s savings.  

Question: What is the best way to save for your children’s future? We have £1,000 a month to save (for two children) and have been advised to put this into an active managed ISA that has fees of 1.87% in our name. Are there more tax-efficient saving vehicles? Would a passive investing approach be better? CR, North Shields

Answer: Firstly, congratulations on putting aside money for your children. It’s often a task on a parent’s to-do list that they never quite get around to. And having £1,000 spare each month for your two children is going to give them a great savings pot for their future life.

Let’s tackle the issue of the account type first.

You could save it in an account under your name, as the adviser has suggested, but this will use up some of your ISA allowance. 

Each adult has a £20,000 annual ISA allowance, so your children’s savings will take a £12,000 chunk out of that for one of you. If you have additional spare money each month that you want to save for yourself, this might prevent you from doing so within an ISA. 

In the worst case you could end up with savings outside an ISA that you then have to pay tax on, that you could have otherwise sheltered from tax in an ISA.

An alternative is to put it in ISAs under your children’s names, in a Junior ISA. Each child is entitled to one of these and you can put up to £9,000 a year into the accounts.

If you split the money between your two children, you’d be putting £6,000 a year into each of their accounts. 

Using a Junior ISA means the money is ringfenced for the child, so you can’t take it out until they turn 18. This has benefits, as you can’t be tempted to dip into it. But it also means you need to be sure that you won’t need it for anything else.

Your next question centres around the type of investment to pick. Your adviser has suggested an actively managed fund, while you suggest a passive approach might be more suitable. There’s no right answer to this, it comes down to preference. 

Put simply, a passive investment approach will cost you less but will only track the performance of the market – never outperform it. With active management you’re paying more to have a fund manager pick stocks for you, but the hope is that this will generate a higher return.

There’s no need to sit entirely in one camp, you could mix the two approaches. For example, having a broader UK stock market tracker and then using an active fund for a more specialist area, such as technology stocks or emerging markets.

Another option is to pick an all-in-one fund, which can be active or passive. These invest in a mixture of different assets and mean you only need to invest in one fund that is already diversified, rather than picking lots of different investments.

When investing for your children it’s important to keep the timeframe in mind. You don’t mention how old your children are, but if they are young you could have 15 or more years until they will access the money at age 18. 

This makes for a decent investment horizon and means you could potentially take more risk with the money, as you have time to ride out the ups and downs of the market. 

Of course, some parents would prefer to play it safe with their children’s savings – it’s down to personal preference and attitude to risk.

Laura Suter is head of personal finance at AJ Bell.

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management,and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.

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Mouthy Money Your Questions Answered panelist, Laura Suter, answers a reader’s question about how to save and invest money on a starting salary.

Question: I’m a young, recent graduate from university and just started my first job where I earn £20,000. I’d like to put away some of my salary each month into investing, but I don’t know where to start or how it works to invest nowadays. Do you have any tips?

Answer: Regular investing – so putting aside money each month – is an ideal route for first time investors like yourself, because it means you can invest a small amount each month into the market and get used to investing.

You can easily set up a direct debit that will automatically transfer the money into your investment account each month (maybe on payday) and then set up regular investing on your platform, which will automatically buy the funds or shares you’ve chosen.

Many investment platforms will allow you to start from as little as £25 or £50 a month, which you can then build up as you get more confidence and more spare cash.

And even if you’re putting away small sums your savings can quickly add up. If you put away £50 a month over 10 years, assuming investment returns of 5% a year after fees, you’d build up a pot of £6,910, while over 20 years you’d end up with £19,175.

A big advantage is that that you don’t have to remember to save and invest your cash each month. Another benefit is that you don’t try to time the market and pick the best point in the month to invest, which is notoriously tricky to do accurately and is an easy trap for first-time investors to fall into.

Drip-feeding your investments each month also provides an in-built protection mechanism during periods of volatility. This is something called ‘pound cost averaging’ and means you should suffer fewer extreme lows in your portfolios if markets fall.

However, charges are one area you need to watch out for. If you’re only investing £25 a month you need to make sure you’re not investing in lots of different funds, as it will cost you a dealing fee each time. You will save money in fees with lots of investment platforms if you opt for regular investing, as many offer a discount to usual dealing fees for signing up to the service.

On AJ Bell Youinvest, for example, you would usually pay £9.95 when you buy or sell shares, but this is reduced to £1.50 if you’re doing so through regular investing.

In order to set up regular investing you’ll need to think about what you want to invest in. It can feel daunting for first-time investors to know what to put their money into or how to navigate markets, but loads of tools, information and guidance have been developed in recent years to make it easier to get going. From curated lists of ‘favourite’ funds to one-stop-shop funds that invest in lots of different assets, there’s lots of options for newcomers.

If you don’t feel confident picking which countries or sectors to invest in you can defer asset allocation decisions to a professional. You can buy so-called ‘all in one’ funds that spread your money between different country’s stock markets and across various asset classes, with an option of having more or less in stock markets versus bonds, gold and cash, depending on your risk appetite.

The Vanguard LifeStrategy funds are one option and investment platforms often offer their own versions too.

Alternatively, first-timers could buy a cheap ‘tracker’ fund, which mimics the performance of a broad global index, such as the MSCI World. Fidelity World Index is one option for this, which has a low annual cost of 0.12%.

If you decide to go down the route of picking your own investments, you need to make sure you understand what you’re buying, and why you think it will make money – whether it’s a fund or a share.

All too often investors are lured in by the promise of high returns or invest because a friend has recommended it, but you need to make sure you understand how the investment works and all the risks before you commit your money.

Once you have set up your investments you want to make sure you’re not checking your account every day, as doing so can mean you end up trading too much. You should be buying investments for the next five or 10 years, not five or 10 days, so you don’t want to be chopping and changing too much.

Apart from anything else the cost of trading will eat into your returns. But becoming too obsessed with the ups and downs in your investments can also mean you panic if they fall one day, meaning you sell and lock in losses.

Laura Suter, head of personal finance at AJ Bell

The opinions expressed in this article should not be construed as financial advice. All investments carry risk, and you can get back less than you invested.

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