Back in July 2020 I found myself with some extra money, I took the opportunity to start an experiment that I have wanted to do for many years for Mrs Mummypenny. I put £1000 into four different savings pots to track how they perform over time. After 3 months I want to share how that money is performing with more information about each of the savings types.
The savings pots range from instant access cash to fixed term cash to investing to my pension. Covering low risk to higher risk and short-term time wise saving to medium and then long term.
Instant Access Cash
My first £1000 saving has gone into instant access cash. An account where I can get at the money immediately in an emergency. This account has been building up with emergency funds for a while now with six months of emergency savings. It is also where I keep my money set aside for tax payment.
I managed to open an account with Marcus, before they stopped new account applications, at a time when the interest payable was 1.2%. This slowly reducing over time, it reduced to 1.05% mid 2020 and now reduces to 0.7% Oct 2020. The return that you get on instant access cash currently is minimal.
My £1000 saving has earned, wait for it, £2.63 in interest. I expect to receive interest of around £8 for the whole year. Don’t worry I won’t go on a mad spending spree.
Fixed Term Savings Account
My second £1000 has gone into a fixed term savings account. The money is locked away for a period of time in return for a higher interest rate. Back in July Zopa had just launched a new fixed term savings product with a market leading interest rate of 1.4% for a two-year period. I opened an account and deposited my £1000.
This account is a bit more of a risk as I have to be certain that I won’t need the money for a full two year period (you can choose various different fixed terms, one, two, five years). The return is a higher rate of interest, but not much more than instant access cash.
My £1000 savings has earned, in three months, £3.50. I expect to earn just over £14 in my first year in interest, closer to £30 for the two years that I hold the account.
It’s a great place to put money that you are certain you won’t need for the short term. Maybe you know that you are making a big purchase in the short term and want to lock the money away so you cannot spend it. Just don’t expect to earn a huge return on your savings.
Investment – Stocks & Shares ISA
My third £1000 has gone into my Stocks & Shares ISA that I hold with Vanguard. I choose to invest my money into balanced funds of shares covering a wide array of industries and countries throughout the world. I put my money into a stocks and shares ISA to ensure that my returns are tax free.
Investing your money is a medium-term strategy, you must be prepared to leave your money in the investment for at least five years. The value of your investment tracks the market that can go up as well as down. There is risk attached to the investment, hence the potential returns are bigger.
I chose to put my £1000 into a life strategy 80% equity fund, that matches my chosen pension fund as closely as possible. This means that 80% of my money is invested into shares and 20% into bonds and similar fixed rate products.
My £1000 is worth £1032 after three months, with a growth of £32. Of course, this is taken at a point in time and this value can quickly go up or down, but this is a great return so far. It works out to be an annual interest rate of around 13%.
You can clearly see here that the added risk of investing my money has resulted in a bigger return.
Pension – My private Pension
My final £1000 goes into my private pension with PensionBee. The biggest benefit here being the tax advantage. My £1000 was contributed by my company, meaning my tax bill will be lower. There is already a 20% gain here of £200. (This depends on your earning levels and tax bands).
I have a private pension already with PensionBee that is a combination of my previous employment pension pots and any contributions I have made since becoming self-employed. My money is currently invested in the tracker fund, a fund managed by State Street Global Advisors on behalf of PensionBee. It is 80% shares and 20% bonds/fixed income products, and I globally invested but with 40% in the UK.
I can see that my £1000 is now worth £1027 after three months, equivalent to an annual return of 11%. Far better than cash and actually very close to the performance of the Vanguard Investment. However, the tax saving makes it the most valuable investment by far.
There is a timing thing with pensions. This money is now locked away until at least the age of 55 (changing to 57 from 2028). In exchange for the tax and potential higher returns the money does have to be locked away for a longer time.
Summary
I will be tracking this performance regularly; it will be very interesting to track the growth (or loss) over time and will emphasise the potential returns you can receive depending on risk levels and time of money locked away, investing and pensions compared to cash.
I will continue to keep a limited emergency fund in instant access cash, but anything extra goes into my investment account and pension for my financial future.
Please be aware that any form of investment can go up and down. You may want to consider advice from a qualified IFA. Just make sure they come recommended by a trusted friend and check their investment levels. Some will only work with clients with an investment level of at least £150k. This post was written in collaboration with PensionBee.
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