If you are looking to make withdrawals of £300 each month from your lump sum, this equates to an interest rate of 7.2% a year. There are no savings accounts paying this much, so you will have to accept that you will be eating into your capital.
As you will be relying on this income and as you might need access to the
remaining lump sum in the near future, you should keep everything in cash.You could potentially earn a better return by investing in stocks and shares but the value of your money could fall and this isn’t a risk it looks like you’re in a position to take.
You should look for cash accounts paying a competitive interest rate, where you can save as tax-efficiently as possible. Choose one that has the flexibility to allow you to make withdrawals and access your money when you need it and is also protected by the Financial Services Compensation Scheme (FSCS).
While many people would automatically think that the best solution is a cash Isa, because all interest on these is tax-free, you can only save up to £15,240 in the current tax year into Isas. Interestingly, there are other cash accounts that might be paying a higher return than cash Isas even after tax is deducted.
A good example of this is the Santander 123 account, which is paying interest of 3% a year on balances up to £20,000, as long as you have at least £3,000 in your account. Even after tax, this equates to a return of 2.4% a year for a basic-rate taxpayer or 1.8% for a higher-rate taxpayer.There are other benefits of this account, including cashback on many of your bills. But there are also some conditions that need to be met, including paying a monthly account fee of £2 (rising to £5 from January 2016).
Using financial websites, such as Moneywise.co.uk/compare, that list details of some of the best savings accounts available to see which ones meet your needs best would be a good place to start. It could be that you should spread your money over two or three accounts.
I would generally suggest also using your annual cash Isa allowance as part of this. However, a new personal savings allowance to be introduced next April means that basic-rate taxpayers can earn savings interest of up to £1,000 each year with no tax liability and higher-rate taxpayers can earn up to £500. You should therefore make sure that a cash Isa is paying a competitive rate and not just use the allowance because any interest is tax-free.
It is sensible that you look around to find the best interest rates and the best savings accounts for you. However, the bottom line is that the longer that you make withdrawals that are greater than the amount of interest you’re earning, the more you will eat into your capital and the less money you will have left to buy a property.
Patrick Connolly is a certified finanical planner for Chase de Vere.