Personal Finance & Money Asked by Omor on March 21, 2021
I’m thinking of creating a small rainy day fund, I’ve seen some of the products and services banks offer, be it ISA accounts with average interest rates, LISA for potential home owners and the new Marcus savings account (unfortunately closed at the moment), I don’t really know the pro’s/con’s of each just the basic information provided.
Does anybody here in the stack exchange have any experience with these products/services, have advise on what to look out for, what to avoid, and what would be beneficial.
Thank you.
For a small fund, don’t bother with any of those. Interest up to £1,000 per year (if you’re not a higher-rate taxpayer) and dividends up to £2,000 per year are tax-free anyway, so there’s no point putting your money in a tax-free vehicle unless you’re likely to go above those amounts. Which you’re not, for “a small rainy day fund“. Just find a regular savings account with a UK-licensed bank (so it’s protected) that pays good interest — riskier investments may give a higher return but aren’t appropriate for a rainy-day fund.
Correct answer by Mike Scott on March 21, 2021
Agree fully with the reasoning in Mike Scott's answer. As a small addendum, given the relatively low interest rates at the moment (2020), one option you might consider is NS&I Premium Bonds1.
Savings in Premium Bonds are backed by the government, so are at least as safe as a normal savings account (up to the maximum holding of £50,000). The "interest rate" (used to fund randomly-drawn prizes, instead of being paid directly) is broadly comparable with easy-access savings accounts2.
The main downside is that because the smallest prize is £25, if you've only got a modest holding, you cannot guarantee winning the equivalent "interest rate" that the prize-fund represents. For example, with £2,500 in a savings account at 1% interest, you would get a guaranteed £25 after a year. With Premium Bonds, because prizes are drawn at random, you cannot guarantee getting one win a year. However, with a more substantial holding, you will get closer to the "true" interest rate more consistently (sometimes above; sometimes below).
And, of course, there's always a chance that you will win a higher-value prize, well above anything you'd get in interest. (In 2004, one person one £1M with a holding of just £17). When I first had "spare" money available, the possibility that I might "win big" was a great incentive to save it (in Premium Bonds) rather than fritter it away, especially when the guaranteed return from a regular savings account would be so low.
1 Disclaimer: Although I've suggested Premium Bonds a number of times on PF&M, I have no affiliation with NS&I, other than being a customer.
2 As of September 2020, the prize-fund rate is 1.4%, dropping to 1.0% in December. MoneySavingExpert is currently showing the best instant-access savings account at 1.1%. (You can get 1.21% with 120 days notice, or 1.5% for a three-year fixed deposit, but those aren't really suitable for a "rainy day" fund).
Answered by TripeHound on March 21, 2021
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