I've inherited £10,000 and am looking where to invest it or what to do with it. I don't want to lock it away for a long time as I will likely need to access it in the next year or so. I've looked at the savings rates for 1 year fixed rate savings bonds but they are poor. I've seen stuff in the press about high interest paying current accounts, such as the Santander 123 account, are they a better option? What about peer-to-peer accounts? I suppose what I'm asking is what is the best £10,000 investment?
My response: The best £10,000 investment
Unfortunately there is no one-size-fits-all best £10,000 investment as it depends on each person's personal circumstances. First of all given that you want to access your capital within 5 years then putting your money in a savings account is your best option. Other types of investment will incur investment risk and the possibility that you will get back less than you paid in. Generally investments beyond saving money in a cash account are only suitable for people with at least a 5 year investment window in which they do not need to access their money. So what you are really asking is what is the best savings account for £10,000?
You don’t mention whether you are an income tax payer or not. Assuming you are then someone with £10,000 to invest would usually look to secure a cash rate within an ISA, as savings account interest is taxable. The advent of the new ISA (NISA) means that you can now place £15,000 into cash within an ISA wrapper and invest in stocks and shares later.
But the best rate you will get on an instant access ISA is only 1.75% for a lump sum (here you can find a roundup of the best ISA accounts for £10,000 plus here is a list of the best savings accounts for £10,000). Tying your money up for a year in a fixed rate ISA won’t earn you any more. To beat the 1.75% tax-free ISA rate you’d need to find an ordinary savings account paying 2.19% if you are a basic rate tax payer or 2.92% if you are a 40% income tax payer.
One way to do that and not lock your money away for a number of years is to use high interest paying current accounts. The Santander account you mention does pay a competitive interest rate of 3% AER but only on balances between £3,000 and £20,0000. But you can get a better rate if you don’t mind opening multiple accounts.
Both Nationwide and TSB have current accounts offering 5% AER but, like the Santander 123 current account, have strict conditions. The Nationwide FlexDirect Current Account requires £1,000 per month paid into the account to qualify for the headline interest rate, which then is payable only on the first £2,500 and the rate drops after a year. Similarly the TSB Classic Plus Account requires £500 a month paid in and the rate is only paid on the first £2,000. But there is nothing to stop you moving the same £1,000 through each account every month, plus you are allowed to hold two TSB accounts and one Nationwide account in your sole name & qualify for the 5% rates. Which makes a grand total of £6,500 in accounts offering 5% AER. All interest is paid monthly. The balance of your £10,000 could be put in the Santander account, but bear in mind there is a monthly £2 fee.
If you a non-tax payer you can register an R85 form with each institution so you receive the interest tax free. Of course much is written about the attractive savings rates offered by peer-to-peer lenders but given your aversion to risk watch out because these, unlike the accounts mentioned above, are not covered by the Financial Services Compensation Scheme.
I hope that helps