Question
I have just sold my house and find myself in the unusual situation of having £400,000 and not quite sure where to put it. I have got as far as thinking of putting £50k in various bank accounts for the moment. I do have plans to buy a boat next year and a Buy to Let as soon as I find a good property, but this will take up around £220,000 and may not be spent for some months- so needs a safe home for the time being.
This of course leaves around £180,000 which I need to invest. I don't need £110,000 for around 8 years so can lock this up within reason-save in emergency- for that period, leaving a further £70k to invest. I am currently on a low income so would look forward to some sort of return but not risk the capital as I retire in the next year or so. I would appreciate your thoughts.
Answer
Spreading the money across various bank accounts within the £50,000 Financial Services Compensation Scheme (FSCS) limit was a sensible move. Just remember that the compensation applies per institution - and some own several banks - so could be worth double checking you're fully covered. Take a look at the list of institutions that own more than one bank on our savings page http://www.candidmoney.com/saving/default.aspx .
The compensation limit is also due to rise to €100,000 (around £84,000) from next year.
As for investing some of the money, if you want to avoid risking your capital (and I don't blame you in the current climate) then your options will be limited.
The obvious starting point is savings. At the time of writing you can get around 4.5% fixed (before tax) on a 5 year account, falling to 4.15% on a 3 year fixed rate account. I wouldn't be too hesitant to lock into a fixed rate as our ailing economy is a big disincentive for the Bank of England to raise interest rates, just check whether an account allows access to your money in an emergency (if relevant), as many don't.
And If you're a taxpayer then using your cash ISA allowance, £5,100 for the current tax year, will save you a bit of tax on interest paid.
If you want stockmarket exposure without the risk then a capital protected stockmarket bond might appeal. For example, the Santander Stockmarket Bond Issue 2 (150% option) returns 150% of FTSE 100 growth over 6 years, capped at 40%. So your maximum equivalent return is 5.78% a year. Is the potential extra return over cash worth the risk that you might get a lower return or even just the return of your initial investment? I'm not convinced, but it's a personal decision. Also bear in mind that these investments are only ever as safe as the bank offering the guarantees.
Similar plans with some risk unsurprisingly pay higher potential returns. For example, the Morgan Stanley FTSE Best Entry Growth Plan 7 offers double the growth of the FTSE 100 Index over 6 years and 2 weeks capped at 100%, a potential maximum equivalent return of 12.25% a year. However, if the index at maturity is lower than the start level by 50% or more your initial investment will be reduced by that percentage - i.e. there's a risk you could lose a lot of money. Any gains are taxed as capital gains which, under current tax rules means you can make up to £10,100 of gains before any tax is due. Although what the capital gains tax system in 6 years time will look like is anyone's guess.
Other than these you could consider corporate bond, commercial property and zero dividend preference shares, all of which should generally be less risky than stockmarket investment, in theory at least (note: the returns on zeros are linked to stockmarkets). However, you could still lose money so I'd be wary unless you're comfortable with this possibility if things don't turn out in your favour - and with markets as uncertain as they are at present I'd suggest being careful.
So sorry, no clever solution I'm afraid. But that's the harsh reality of investing at the moment. There's a lot of potential risk out there and while I'm sure some investment areas will end up doing well over the next few years, others won't. Given it's impossible to accurately predict winners and losers then unless you're prepared to risk your capital probably better to play safe.
I have just sold my house and find myself in the unusual situation of having £400,000 and not quite sure where to put it. I have got as far as thinking of putting £50k in various bank accounts for the moment. I do have plans to buy a boat next year and a Buy to Let as soon as I find a good property, but this will take up around £220,000 and may not be spent for some months- so needs a safe home for the time being.
This of course leaves around £180,000 which I need to invest. I don't need £110,000 for around 8 years so can lock this up within reason-save in emergency- for that period, leaving a further £70k to invest. I am currently on a low income so would look forward to some sort of return but not risk the capital as I retire in the next year or so. I would appreciate your thoughts.
Answer
Spreading the money across various bank accounts within the £50,000 Financial Services Compensation Scheme (FSCS) limit was a sensible move. Just remember that the compensation applies per institution - and some own several banks - so could be worth double checking you're fully covered. Take a look at the list of institutions that own more than one bank on our savings page http://www.candidmoney.com/saving/default.aspx .
The compensation limit is also due to rise to €100,000 (around £84,000) from next year.
As for investing some of the money, if you want to avoid risking your capital (and I don't blame you in the current climate) then your options will be limited.
The obvious starting point is savings. At the time of writing you can get around 4.5% fixed (before tax) on a 5 year account, falling to 4.15% on a 3 year fixed rate account. I wouldn't be too hesitant to lock into a fixed rate as our ailing economy is a big disincentive for the Bank of England to raise interest rates, just check whether an account allows access to your money in an emergency (if relevant), as many don't.
And If you're a taxpayer then using your cash ISA allowance, £5,100 for the current tax year, will save you a bit of tax on interest paid.
If you want stockmarket exposure without the risk then a capital protected stockmarket bond might appeal. For example, the Santander Stockmarket Bond Issue 2 (150% option) returns 150% of FTSE 100 growth over 6 years, capped at 40%. So your maximum equivalent return is 5.78% a year. Is the potential extra return over cash worth the risk that you might get a lower return or even just the return of your initial investment? I'm not convinced, but it's a personal decision. Also bear in mind that these investments are only ever as safe as the bank offering the guarantees.
Similar plans with some risk unsurprisingly pay higher potential returns. For example, the Morgan Stanley FTSE Best Entry Growth Plan 7 offers double the growth of the FTSE 100 Index over 6 years and 2 weeks capped at 100%, a potential maximum equivalent return of 12.25% a year. However, if the index at maturity is lower than the start level by 50% or more your initial investment will be reduced by that percentage - i.e. there's a risk you could lose a lot of money. Any gains are taxed as capital gains which, under current tax rules means you can make up to £10,100 of gains before any tax is due. Although what the capital gains tax system in 6 years time will look like is anyone's guess.
Other than these you could consider corporate bond, commercial property and zero dividend preference shares, all of which should generally be less risky than stockmarket investment, in theory at least (note: the returns on zeros are linked to stockmarkets). However, you could still lose money so I'd be wary unless you're comfortable with this possibility if things don't turn out in your favour - and with markets as uncertain as they are at present I'd suggest being careful.
So sorry, no clever solution I'm afraid. But that's the harsh reality of investing at the moment. There's a lot of potential risk out there and while I'm sure some investment areas will end up doing well over the next few years, others won't. Given it's impossible to accurately predict winners and losers then unless you're prepared to risk your capital probably better to play safe.
Read this Q and A at http://www.candidmoney.com/questions/question320.aspx
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