Paying monthly income from a lump sum

Question

I live in the UK, and am just starting a 4-year PhD programme. My living expenses are funded by means of a tax-free stipend of £16,553 per year, paid in quarterly instalments of £4138.25.

To help with budgeting, I would like to pay myself a monthly income from this stipend. My question is about where would be best for me to store these lump sums of £4138.25 from which I will pay myself an income.

I live in an expensive city, and my budget is fairly tight, so I would like to avoid scenarios where I could potentially lose some money from this stipend. For this reason I have ruled out investing my stipend in funds. (Is this a wise decision?)

The remaining options I have come up with are to invest my stipend in either a Cash ISA or a high-interest savings account.

If I were to go for a Cash ISA, I think I would have to choose an 'easy access' ISA, since my regular withdrawals would result in fairly severe penalties if I were to invest in a higher interest fixed-rate ISA. The best easy access Cash ISA I can find is from Charter Savings, and offers 1.1% AER, which can be paid monthly.

If I were to go for a high-interest savings account, I would be limited by the fact that my deposits in the account would only be made quarterly, which would exclude some of the higher rate accounts that require monthly deposits to be made. The highest rate savings account I could find that I would eligible for is also from Charter Savings, and offers 1.26% AER, which can be paid monthly. However, this rate does not include a bonus, so could fall in the future.

My instinct is to go with the Cash ISA, since, although it does offer a slightly lower interest rate, this rate is guaranteed.

Question: Is there a better way for me to invest my stipend for payment of a monthly income than in a Cash ISA?

Answer 1

First, bear in mind that you're talking about having an average of ~£2000 saved up at any given time (if you spend all your stipend every quarter at a steady rate you'll start out with all of it and have none left at the end of the quarter), along with any long-term savings you manage to build up over time. In today's low-interest rate environment of ~1% interest rates, we're talking about approximately £20/year interest. So it's not worth a huge amount of effort to optimise this.

You mentioned a "bonus", but looking at the Charter Savings website I don't actually see one listed for either the Cash ISA or the savings accounts you mention. In general, banks in the UK actually use bonus rates as a short-term measure to suck in new customers, and the bonuses typically expire after a while leaving you with a worse rate.

Also, I don't think either of the rates you mention is guaranteed - they are both listed as "variable". In reality, I doubt they will go down too much more, given that the likely next move in UK interest rates is upwards.

The typical main advantage of an ISA is its tax free nature. But from your question I assume you don't have any other income, so you won't need to pay tax on any interest you earn outside an ISA either. Also, given that your budget is quite tight and you expect to spend most or all of your stipend, there's no advantage to using an account where you can build up long-term tax-free savings. Even if you do have a few thousand pounds left over by the end of your PhD, you'll easily be able to put those into an ISA at that point given the annual limit of £20K.

You're right not to want to take any risks with the money, and there aren't really any risk-free investments other than savings accounts available, at least on the timescales you're talking about. So overall I'd just go for the 1.26% return.

Edit: as @marktristan's answer points out, you will probably be able to find a "loss leader" current account that actually offers more interest than a savings account. You'll need to either use a single current account and manage your budgeting carefully, or use a second current account as your "savings" account and make sure to set things up to satisfy the requirements of the account you choose, such as incoming payments or outgoing direct debits.

Answer 2

First of all, I agree with both the conclusion in the question and Ganesh’s answer – avoid funds or stockmarket based instruments, given the short timescale and need to draw an income.

However I think looking at savings accounts only is missing a trick.

At the moment there are several current accounts that pay >2% interest on balances the size of which you’re proposing.

The list of which accounts are offering which rates / conditions at which point in time will vary, so here is a link to a good source of regularly updated information:

https://www.moneysavingexpert.com/savings/savings-loophole

There are some conditions, but the best interest rate on offer (that isn't limited to one year) appears to be 3% – much better than the leading instant access savings account.