In our weekly series, readers can email any question about their finances, to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at money@inews.co.uk
Question: We’ve just got £100,000 from my husband’s property sale. We are looking to buy this year, hopefully a property of around £500,000. £100,000 is too much to put in an ISA and equally we don’t really want to invest in stocks because we will want the money within the next six months. What is the best option for the cash, as we don’t really want it all sitting in low returns savings and accruing tax – we’re both higher rate taxpayers.
Answer: With a house purchase likely later this year, the priority here isn’t squeezing every last pound of return out of the £100,000, but keeping the money safe, accessible and not creating an unnecessary tax headache.
A six-month timeframe is simply too short for stock market investing to make sense, as there’s a real risk that values could fall just when you need the cash, which would be deeply frustrating when you’re on the cusp of such a big purchase.
Given you’re both higher-rate taxpayers, Premium Bonds are a sensible option to consider. You can each hold up to £50,000, meaning the full £100,000 could be sheltered without generating taxable interest.
Any prizes you win are entirely tax-free, so there’s no danger of breaching your personal savings allowance or having to worry about declaring interest on a tax return. The current prize fund rate is 3.6 per cent, which makes them broadly competitive with many easy-access savings accounts once tax is factored in.
To put some numbers on it, someone holding the maximum £50,000 has an average “expected” return of around £1,800 over a full year at today’s prize fund rate. Over six months, that would equate to roughly half of that. However, it’s important to be clear that this is not guaranteed.
Premium Bonds don’t pay interest in the traditional sense, and there is always a chance you could win nothing at all over a short period, even with a large holding. That uncertainty is the trade-off for the tax-free treatment.
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That said, people with the maximum holding do typically see regular, smaller prizes, often £25 or £50, which can add up over time.
There’s also the psychological benefit that shouldn’t be dismissed. Each monthly draw brings a bit of excitement while you wait, rather than watching interest trickle in.
And while it shouldn’t be the basis of a financial plan, there is always the very real, if slim, possibility of a larger win.
For some, the idea that a prize could stretch the budget towards a bigger house, a better location or simply a more comfortable buffer is part of the appeal, even if it is ultimately a gamble.
It’s important to keep that in perspective. Premium Bonds are not a substitute for investing, and for most long-term savers, a diversified investment portfolio has historically delivered much stronger returns and beaten inflation over time. But this money isn’t earmarked for the long term.
In your situation, Premium Bonds sit in a useful middle ground, offering capital security, tax efficiency and a chance of return without locking you into risk you don’t need to take right now.
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One final practical point. It sounds as though the £100,000 currently sits in your husband’s name. If he were to move some of that money into your own Premium Bonds allowance, that would technically be a gift, but because you’re married, there are no inheritance tax implications to worry about.
Once transferred, the money is legally yours, allowing you both to use your full allowances and keep things simple.
It may not be the most exciting answer on paper, but when you’re waiting to make one of the biggest purchases of your life, a low-stress, tax-efficient approach, with a bit of fun along the way, can be exactly what’s needed.
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