3

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.

3

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.

4

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).

2
  • 1
    The prize rate fund being 1.4% does not mean that your expected return is 1.4% though, see moneysavingexpert.com/savings/premium-bonds for more details. Personally I have a couple of hundred pounds in Premium Bonds just for the chance they might win big, but I do not expect any real return from them and they are subject to inflationary loss over time. – Vicky Sep 27 '20 at 10:27
  • 1
    @Vicky As I said, on average you won't get the full "interest rate" on low/modest holdings (but then the interest from a normal savings account with a "couple of hundred pounds" is close to negligible as well). If you get a few thousand and above (as a rainy day fund probably should be), things begin to even out, as I saw when I was able to save regularly. Through an inheritance a few years back, I was able to max-out my holding, and since then have averaged just under 1.7% (though, unfortunately, nothing more than £500 in one go: mostly a (fairly) steady stream of £25s). – TripeHound Sep 27 '20 at 11:16

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.