UK Savings and Investments - need help rearranging

[jade]

Hi all,

We are a couple cased in our forties the UK. I posted a case study a few months ago and got some great help with setting up investments including a pension and VLS60:

http://forum.mrmoneymustache.com/ask-a-mustachian/reader-case-study-mortgage-free-uk-couple-now-need-investment-advice/msg1243336/#msg1243336

We need some further advice about how to rearrange our savings, particularly as £14k + in our Santander 123 account is now earning 1.5% as of 1.11.16 rather than 3%. We want a safety net of around £20k as we are both self-employed/freelance.
To get started, I am trying to work out what to do till the end of the UK tax year (5 Apr 17).

Current savings/investments:

£4k in Kent Reliance (3.25%) – we can put £500 each per month
£1k in Rate setter (variable around 3-4% + £100 bonus) may remove this from Ratesetter in about 9 months when we have had it for a year.
£6k in TSB (currently 5% on 2k, this is an account each plus a joint account but as of Jan 2017, they will only pay 5% up to 1.5k in each account so we’ll have an extra £1.5k to move out of here too)
£14k+ in Santander 123
£700 in VLS60 with Charles Stanley Direct

Total: £25,700k+

The plan originally was to empty the Santander account to around 4k and move the bulk over to Kent Reliance at 1k a month but I can see that it’s going to take nearly a year to do that with the bulk of the Santander money earning a low rate in the meantime. We don’t really want to open up any more current / savings accounts ideally.

Earnings

We are never 100% sure how much we’ll earn but based on last year till the end of this tax year:
Nov: £2000
Dec: £1800
Jan: £2578
Feb: £1400
Mar: £2450

We live on approx. £1k a month so based on this will have a further £5228 by end of March 2017 to save / invest.

My initial thoughts are to invest £1k a month extra on top of the £200 direct debit into our VLS60, at least till the end of the tax year in Apr. We will probably still have more than we have now in easy access savings but with an extra £5k in S & S rather than in low interest savings accounts. We are quite risk adverse and new to the S & S scene so wanted to get some advice here about this and if folks think this is a good idea, the best way to funnel that £1 a month into the VLS60? i.e. is it better to do £500 twice a  month?

I hope I have explained this clearly. Any clarification needed, let me know!

Thanks for your help in advance.

[Butterfingers]

£20k is a very big safety net. I appreciate that your income is variable and (perhaps) precarious, but at £1,000 a month that's 20 months of expenses. The opportunity cost of keeping so much cash, especially now that interest rates have nose-dived and inflation is on the rise, is considerable. In your shoes I'd want to cut that to 6 months (£6k) and have the rest invested more profitably (into your VLS60 would be good). In a real, prolonged dry spell you could get a supermarket cashier job or sell your funds, but that's unlikely to happen. But it all depends on your risk tolerance.

My initial thoughts are to invest £1k a month extra on top of the £200 direct debit into our VLS60, at least till the end of the tax year in Apr. We will probably still have more than we have now in easy access savings but with an extra £5k in S & S rather than in low interest savings accounts. We are quite risk adverse and new to the S & S scene so wanted to get some advice here about this and if folks think this is a good idea

Based on my comments above about reducing your cash holdings, I'd throw the whole of the 123 account into the VLS60 and close the 123. You'd still have £11k in cash, and could add to that at the rate of £1k a month if you wanted to.

But as you mentioned how risk averse you are, I'd look at when the 123 becomes uneconomical to hold. That will be pretty soon if you are taking out £1k a month to feed into the Kent Reliance account. If you're set on not opening new accounts then you're going to have to accept earning a negative real rate of interest on at least some of your money. The Bank of England is predicting inflation to rise above 2% before too long, so anything earning less than that is losing money in real terms. If you could open new accounts (Nationwide Flexdirect, for example) then you'd be able to get a decent rate on a bit more cash for a bit longer.

the best way to funnel that £1 a month into the VLS60? i.e. is it better to do £500 twice a  month?

The oft-repeated wisdom here is that "time in the market" on average beats "pound cost averaging" (i.e. drip-feeding your contributions in). So basically whack it all in there as soon as possible.

[jade]

thanks Butterfingers, I appreciate your thoughts.

We are quite tentative about S & S I guess still and the risks involved, but appreciate that there are risks from not investing too. I guess being aware that S & S are not guaranteed and not being able to get the money back out (ideally) is playing on our mind. I guess it's also a mind shift from just saving.

Part of why we want 20k ish is in case our work dried up plus for our home i.e. if our roof needed replacing, boiler packed up etc (both are quite old :)). But yes, if inflation rises as planned, we may need to accept negative interest rates in this case. I will have a look at other accounts, Nationwide could work well too.

"time in the market" on average beats "pound cost averaging" - interesting. We had it in our heads the other way around but can see the wisdom.

Will have a think.

Thanks again.

[Butterfingers]

I guess it's also a mind shift from just saving.

It is, and it's also a long-term strategy – over fifteen years you can afford to watch the market dip and soar with relative equanimity. 

Part of why we want 20k ish is in case our work dried up plus for our home i.e. if our roof needed replacing, boiler packed up etc (both are quite old :)).

I appreciate your caution. A roof replacement would be about £5k (depending on your home and location), a new boiler up to £2k. In the nightmare scenario where both needed doing and your combined income had dropped to zero then you'd have enough to do the work and live for half a year. So you're self-insuring against this scenario by keeping a large amount of cash. But how unlikely is that combination of disasters, with no possibility of taking on other work? I would say "very". And even if it did happen, you could sell your shares to cope. Selling your VLS60 is not an ideal scenario, especially if they're in a dip, but it's a plausible last resort. Leaving so much in cash as a hedge against a hundred-to-one shot just makes my palms itch. But again, your risk tolerance is lower than mine, and you have to make decisions that you feel comfortable with.

"time in the market" on average beats "pound cost averaging" - interesting. We had it in our heads the other way around but can see the wisdom.

There's a good article on this subject from the Monevator (they have facts and numbers and other such fripperies): http://monevator.com/lump-sum-investing-versus-drip-feeding/ The tl;dr is: in your scenario, lump sum beats drip-feeding 67% of the time in the UK, but there are some psychological reasons some people opt for drip-feeding, especially with very large amounts.

[jade]

Thanks again Butterfingers, lots of food for thought! Appreciate your input, we can have a chat about the options. That monevator article was very enlightening too.

[dreams_and_discoveries]

Hi Jade -

Yep, I'm with you on the Santander 123, it's a shame the rate has dropped, but I'm surprised they kept it at 3% that long, given the underlying base rate and economics.  I'm just going to stick with it at the moment, as my balance changes a lot (pay myself quarterly) and I don't want the additional hassle of moving money around all the time for a few extra pennies that the taxman will take 40% of.  I only have my expenses for the next 0-4 months and my tax bill in cash accounts, everything else is in the market/P2P, I'm getting quite risk tolerant.

[jade]

Hi Jade -

Yep, I'm with you on the Santander 123, it's a shame the rate has dropped, but I'm surprised they kept it at 3% that long, given the underlying base rate and economics.  I'm just going to stick with it at the moment, as my balance changes a lot (pay myself quarterly) and I don't want the additional hassle of moving money around all the time for a few extra pennies that the taxman will take 40% of.  I only have my expenses for the next 0-4 months and my tax bill in cash accounts, everything else is in the market/P2P, I'm getting quite risk tolerant.

I know, it is a shame but not a surprise as you said. Sounds wise not to move around in your situation and at least there is the 1.5%.

[jade]

I guess it's also a mind shift from just saving.

It is, and it's also a long-term strategy – over fifteen years you can afford to watch the market dip and soar with relative equanimity. 

Part of why we want 20k ish is in case our work dried up plus for our home i.e. if our roof needed replacing, boiler packed up etc (both are quite old :)).

I appreciate your caution. A roof replacement would be about £5k (depending on your home and location), a new boiler up to £2k. In the nightmare scenario where both needed doing and your combined income had dropped to zero then you'd have enough to do the work and live for half a year. So you're self-insuring against this scenario by keeping a large amount of cash. But how unlikely is that combination of disasters, with no possibility of taking on other work? I would say "very". And even if it did happen, you could sell your shares to cope. Selling your VLS60 is not an ideal scenario, especially if they're in a dip, but it's a plausible last resort. Leaving so much in cash as a hedge against a hundred-to-one shot just makes my palms itch. But again, your risk tolerance is lower than mine, and you have to make decisions that you feel comfortable with.

"time in the market" on average beats "pound cost averaging" - interesting. We had it in our heads the other way around but can see the wisdom.

There's a good article on this subject from the Monevator (they have facts and numbers and other such fripperies): http://monevator.com/lump-sum-investing-versus-drip-feeding/ The tl;dr is: in your scenario, lump sum beats drip-feeding 67% of the time in the UK, but there are some psychological reasons some people opt for drip-feeding, especially with very large amounts.

Thanks again for all your help, Butterfingers. We're now looking at reducing the emergency sum to more like 10k and doing what you suggest with the VLS60. The Santander account may become un-viable so having a look at our options.

[UKMustache]

You could perhaps beat that rate if you opened two first direct accounts (one each)?

They will give you £100 if you switch a current account to them (and you would need to check the terms on this) then they have a regular savings account paying 5% with a maximum monthly contribution of £300.

Fag-packet calculations here so forgive any mistakes but...

2 x £100 opening bonus = £200
2 x interest on max contribution (£3,600 each) = £194

So that's £394 interest/bonus on £7,200 which is about 5.4% I think.


That's only a 12 month fix but it certainly beats £108 on the same amount with Santander :)

[jade]

You could perhaps beat that rate if you opened two first direct accounts (one each)?

They will give you £100 if you switch a current account to them (and you would need to check the terms on this) then they have a regular savings account paying 5% with a maximum monthly contribution of £300.

Fag-packet calculations here so forgive any mistakes but...

2 x £100 opening bonus = £200
2 x interest on max contribution (£3,600 each) = £194

So that's £394 interest/bonus on £7,200 which is about 5.4% I think.


That's only a 12 month fix but it certainly beats £108 on the same amount with Santander :)

Thanks UKMustache. The £100 bonus is enticing and they have good customer service ratings. They could work.

[UKMustache]

You could perhaps beat that rate if you opened two first direct accounts (one each)?

They will give you £100 if you switch a current account to them (and you would need to check the terms on this) then they have a regular savings account paying 5% with a maximum monthly contribution of £300.

Fag-packet calculations here so forgive any mistakes but...

2 x £100 opening bonus = £200
2 x interest on max contribution (£3,600 each) = £194

So that's £394 interest/bonus on £7,200 which is about 5.4% I think.


That's only a 12 month fix but it certainly beats £108 on the same amount with Santander :)

Thanks UKMustache. The £100 bonus is enticing and they have good customer service ratings. They could work.

I liked them, unfortunately when I joined they were offering £100 to unsatisfied customers to leave after 6 months too!

So I went and joined halifax for another £100 bonus and £5 a month 'reward'. 

Joining firstdirect (£125) + leaving (£100) + joining halifax (£100) + 'reward' (£60 1st year) = £385 for a few phone calls :) *

Playing the system is fun :D

*amounts might not be entirely accurate, this was 12-18 months ago

[jade]

You could perhaps beat that rate if you opened two first direct accounts (one each)?

They will give you £100 if you switch a current account to them (and you would need to check the terms on this) then they have a regular savings account paying 5% with a maximum monthly contribution of £300.

Fag-packet calculations here so forgive any mistakes but...

2 x £100 opening bonus = £200
2 x interest on max contribution (£3,600 each) = £194

So that's £394 interest/bonus on £7,200 which is about 5.4% I think.


That's only a 12 month fix but it certainly beats £108 on the same amount with Santander :)

Thanks UKMustache. The £100 bonus is enticing and they have good customer service ratings. They could work.

I liked them, unfortunately when I joined they were offering £100 to unsatisfied customers to leave after 6 months too!

So I went and joined halifax for another £100 bonus and £5 a month 'reward'. 

Joining firstdirect (£125) + leaving (£100) + joining halifax (£100) + 'reward' (£60 1st year) = £385 for a few phone calls :) *

Playing the system is fun :D

*amounts might not be entirely accurate, this was 12-18 months ago

That's a very good deal, well done! :) I enjoy playing around with these too. Will have a look at FD.

[jade]

You could perhaps beat that rate if you opened two first direct accounts (one each)?

They will give you £100 if you switch a current account to them (and you would need to check the terms on this) then they have a regular savings account paying 5% with a maximum monthly contribution of £300.

Fag-packet calculations here so forgive any mistakes but...

2 x £100 opening bonus = £200
2 x interest on max contribution (£3,600 each) = £194

So that's £394 interest/bonus on £7,200 which is about 5.4% I think.


That's only a 12 month fix but it certainly beats £108 on the same amount with Santander :)

Thanks UKMustache. The £100 bonus is enticing and they have good customer service ratings. They could work.

I liked them, unfortunately when I joined they were offering £100 to unsatisfied customers to leave after 6 months too!

So I went and joined halifax for another £100 bonus and £5 a month 'reward'. 

Joining firstdirect (£125) + leaving (£100) + joining halifax (£100) + 'reward' (£60 1st year) = £385 for a few phone calls :) *

Playing the system is fun :D

*amounts might not be entirely accurate, this was 12-18 months ago

That's a very good deal, well done! :) I enjoy playing around with these too. Will have a look at FD.

Looks like FD is still doing the £100 if you leave after 6 months!

[Butterfingers]

Thanks again for all your help, Butterfingers. We're now looking at reducing the emergency sum to more like 10k and doing what you suggest with the VLS60. The Santander account may become un-viable so having a look at our options.

Oh God! Now if VLS60 dips by 30% and your roof collapses I'm going to feel horrendous!

I do think you've made the right choice though. Best of luck.

[jade]

Thanks again for all your help, Butterfingers. We're now looking at reducing the emergency sum to more like 10k and doing what you suggest with the VLS60. The Santander account may become un-viable so having a look at our options.

Oh God! Now if VLS60 dips by 30% and your roof collapses I'm going to feel horrendous!

I do think you've made the right choice though. Best of luck.

Ha! I take full responsibility for my choices :)