Where to keep an emergency fund in the UK

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Topic Author
adrihead
Posts: 9
Joined: Mon Apr 08, 2019 5:52 pm

Where to keep an emergency fund in the UK

Post by adrihead »

Hello all,

So I am definitely a begginer investor residing in the UK and I wonder where I could keep my emergency fund. I have my current account at Santander and I have been checking their ISAs and savings accounts... the highest interest rate for an ISA at Santander is a variable rate of 1.50% AER. Would that be an acceptably high interest rate for an emergency fund? Moreover, the fact that it's a variable rate would mean that at some point the interest might be negative... should I be running that risk for an emergency fund?

Cheers to you all and sorry for the really newbie questions,
:)
danielbird193
Posts: 36
Joined: Thu Mar 21, 2019 2:15 pm

Re: Where to keep an emergency fund in the UK

Post by danielbird193 »

Your emergency fund is just that - a pot of cash that you can access easily in case you need it in a hurry (e.g. your boiler breaks down and needs to be replaced). You wouldn't want to sell investments to fund that expenditure, so you keep some cash aside just in case.

By definition it should not be a risk-seeking part of your asset allocation. In fact it should be risk averse. The most important thing is that the cash is there when you need it.

The ISA sounds fine although I prefer to keep mine in Premium Bonds and use my ISA allowance for invested assets because of the tax benefits. Premium Bonds are government backed, the cash will be in my account within 48 hours if I need it, plus I may wake up one month as a millionaire!

You ask whether it matters that the interest rate on your cash ISA is lower than inflation. Your portfolio overall needs to beat inflation, but that should be achieved by keeping 95% (or whatever percentage) of your assets in return-seeking investments, meaning you don't need to worry about this issue for the smaller percentage invested for safety and ease of access.
Topic Author
adrihead
Posts: 9
Joined: Mon Apr 08, 2019 5:52 pm

Re: Where to keep an emergency fund in the UK

Post by adrihead »

danielbird193 wrote: Mon Apr 08, 2019 7:56 pm Your emergency fund is just that - a pot of cash that you can access easily in case you need it in a hurry (e.g. your boiler breaks down and needs to be replaced). You wouldn't want to sell investments to fund that expenditure, so you keep some cash aside just in case.

By definition it should not be a risk-seeking part of your asset allocation. In fact it should be risk averse. The most important thing is that the cash is there when you need it.

The ISA sounds fine although I prefer to keep mine in Premium Bonds and use my ISA allowance for invested assets because of the tax benefits. Premium Bonds are government backed, the cash will be in my account within 48 hours if I need it, plus I may wake up one month as a millionaire!

You ask whether it matters that the interest rate on your cash ISA is lower than inflation. Your portfolio overall needs to beat inflation, but that should be achieved by keeping 95% (or whatever percentage) of your assets in return-seeking investments, meaning you don't need to worry about this issue for the smaller percentage invested for safety and ease of access.
Thank you very much for your answer. I didn't know about Premium Bonds and at least they sound exciting. I'll sleep on it to decide if I just open a savings account or try the Premium Bonds.
TedSwippet
Posts: 3167
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Where to keep an emergency fund in the UK

Post by TedSwippet »

danielbird193 wrote: Mon Apr 08, 2019 7:56 pmThe ISA sounds fine although I prefer to keep mine in Premium Bonds ...
The problem I have with premium bonds is that while their 'annual prize rate' is currently 1.4%, unless you hold a lot of them you won't get close to that. Only a few lucky (large prize) winners beat that 1.4%, and these large prizes are what drags the average up to 1.4%. To make that 1.4% rate, for every person that wins the £1mm, a lot of others have to win nothing. With £1000 in premium bonds, your median average winnings will be £0.

There's a very nice write-up of all of this at MoneySavingExpert.
Valuethinker
Posts: 41155
Joined: Fri May 11, 2007 11:07 am

Re: Where to keep an emergency fund in the UK

Post by Valuethinker »

adrihead wrote: Mon Apr 08, 2019 6:01 pm Hello all,

So I am definitely a begginer investor residing in the UK and I wonder where I could keep my emergency fund. I have my current account at Santander and I have been checking their ISAs and savings accounts... the highest interest rate for an ISA at Santander is a variable rate of 1.50% AER. Would that be an acceptably high interest rate for an emergency fund? Moreover, the fact that it's a variable rate would mean that at some point the interest might be negative... should I be running that risk for an emergency fund?

Cheers to you all and sorry for the really newbie questions,
:)
As per others I would not keep cash in an ISA.

If the FTSE All-share is paying around 4% yield, say, then in a non-ISA account all your dividend income above £2000 pa will be taxed at your marginal rate - either 20% or 40% (or 45% if you are on a high enough income). Also you may have capital gains - probably will in the long run if you stay the course with index funds.

For cash, any interest rate is good news. 1.5% is acceptable, after tax either 1.2% or 0.9%. Not as much as inflation, but such is life ;-).

Does not sound like this is an issue, but remember not to have more than £85k at any single financial institution in insured deposits if you can avoid it. Better safe than sorry.

Remember to get any employer match offered on your pension contributions. Due to tax law changes ISAs are generally now preferred over pensions, however it's important to maximize the employer contribution (if any) above the statutory 5% individuals must put in.
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