I’ve been gifted a few thousand pounds towards buying a house but we won’t buy for at least 12 months.
It is currently sitting in a 0.03 per cent current account that I have had forever.
I’m wondering about putting this money to work but I know nothing about this side of the world and I am not sure what my options are.
Do you have any tips? Are there any high interest rate Isas or should I invest it?
— Lauren, by email
If you’re looking to spend this money within five years, it probably makes more sense to keep it in a cash savings account rather than investing it
Sarah Davidson, of This is Money, replies: When it comes to making your money work for you, there are a couple of things to consider.
Firstly, what is the money for and secondly, how long can you leave it untouched before you need to spend it.
Generally speaking, if you are looking to spend this money – on a deposit for a home or anything else – within the next five years, it’s a better option to leave it in cash than invest it.
This is because the value of investments can go down as well as up and in the short-term, this fluctuation can be volatile.
For this reason, most financial advisers would tell you that for an investment to grow reliably, you need to tuck your money away for a minimum of five years.
Given it sounds like you will want to spend this money before 2023, keeping it in a cash account is probably a safer bet.
There are a number of options for saving cash including a straightforward savings account, a fixed rate bond and a range of different types of Isa.
Straightforward savings account rates are pretty low at the moment, with the best buy ICICI Bank’s Hi-Save Bonus Saver which pays 1.35 per cent for one year, after which the rate drops.
Fixed rates offer higher interest as they require you to lock your money away for a fixed time period.
The best one-year fixed rate is currently 1.85 per cent, available from Al Rayan Bank, Wyelands Bank and United Trust Bank. These each have a different minimum deposit amount with the Wyelands account requiring a minimum deposit of £5,000.
United Trust Bank allows access to this rate with a minimum deposit of £500.
The 5% savings trick
There are several current accounts that also offer great sign-up interest rates.
If you don’t already bank with Nationwide, you can open a Flex Direct account which pays 5 per cent interest for the first 12 months on balances of up to £2,500.
After this, interest reverts to 1 per cent, and to qualify for these rates, you’ll need to pay £1,000 into the account each month.
Note also, that the 1.85 per cent offered by Al Rayan Bank is not interest as this is a Sharia-compliant bank. Instead, this rate is the ‘expected profit rate’. The bank monitors the target profit on a daily basis to ensure it is achievable.
Fixing for longer – say five years – reaps a higher rate of interest. Vanquis Bank offers the best buy rate at the moment, of 2.61 per cent.
Technically income tax is payable on these accounts as they don’t benefit from the tax-free status of the Isa. However, everyone resident in the UK has a personal savings allowance, which allows you to earn up to £1,000 a year in savings interest. It’s unlikely you’ll exceed this barrier.
Isas are another option, with the best one-year fixed rate available from Al Rayan Bank at 1.5 per cent.
However, Sarah’s suggestion below, that you look into both the Help to Buy Isa and the Lifetime Isa, could be a good option.
This is because these accounts both offer an extremely generous government bonus on top of what you save into the account.
This means that for every £400 you put in, the government will put in £100. This outstrips the amount of interest you could earn from an ordinary savings account by miles.
Just one thing to bear in mind – in order to qualify for the bonus, you must use the money for your deposit to buy your first home under the Help to Buy Isa rules, and for either this or towards your pension income under the Lifetime Isa rules.
We asked personal finance analyst Sarah Coles, from Hargreaves Lansdown, to run you through the options. Here’s what she said.
Sarah Coles: Once you bust the first year’s Help to Buy Isa allowance, then the lifetime Isa becomes a serious contender
Because you are using this gift as part of your house deposit, you have the opportunity to use one of two Isas designed specifically for this: the Help to Buy Isa and the Lifetime Isa.
Both of them come with a government bonus worth 25 per cent of everything you put in, which makes them the most rewarding ways to save for a property at the moment.
Given the length of time you’re putting the money away for, it makes sense to save in cash, which you can do in both Isas. You can only get a bonus on one or the other, so you’ll need to make a choice between them.
The first step is to check if you qualify for a lifetime Isa, which means you need to be aged between 18 and 39 and confident that you are happy to wait at least 12 months from the date you open it before buying a house.
If you don’t qualify for the lifetime Isa, then the Help to Buy Isa is your best option.
If you qualify for both, and were to glance at the interest rates available, you could be forgiven for assuming that Help to Buy version is better anyway, because the best rate on the market is 2.53 per cent from Barclays.
The best rate on a cash lifetime Isa is 0.75 per cent from Skipton.
The higher rate means that if you have up to £3,400 (the maximum you can save into a Help to Buy Isa in the first year) then this is the one to pick.
However, you also need to consider whether that’s going to give you enough money to cover the deposit on a property.
You may need to save more towards your property purchase alongside this original gift, and once you bust the first year’s Help to Buy Isa allowance, then the lifetime Isa becomes a serious contender.
Even though the interest rate is lower, you can pay in £4,000 a year so you get a bigger bonus (£1,000 instead of £850), the bonus is also paid faster, so you earn interest on it, making the lifetime Isa the better option for larger sums.
If you have more than £4,000 to save, the way the allowance works makes the lifetime Isa even more attractive.
While Help to Buy Isa contributions have to be paid monthly, the lifetime Isa allowance can be paid in at any time during the financial year, which runs from 6 April to April 5.
It means you could contribute £4,000 now, and another £4,000 on 6 April 2019, so you would be able to put up to £8,000 into it over the next 12 months – and receive total bonuses of £2,000 as well as the interest.