What are my best short-term savings options?

6 January 2012

Q: I've just inherited £10,000. I'm looking to buy a new car in around three to six months, but I would like to invest the money in the meantime. Is there anywhere I could invest this money for such a short period that would give me a decent return?

A: Patrick Connolly is a certified financial planner at AWD Chase de Vere.

If you are investing money you will shortly need access to, typically within five years, the money should be kept in cash, so that you don't risk your capital. If you invested the money in the stockmarket and it subsequently fell in value, you would not be able to buy the car you want.

The first question you need to ask yourself is: How much am I looking to spend on a car? If you don't need to use all of your money and can invest what you don't need for a longer period, you could consider investing this sum in a stocks and shares ISA.

The money you will need for the car should be deposited in a cash account. You need to find an account that will give you access to your cash when you want it, pay a competitive rate of interest and help minimise your tax liability.

You can address the latter need by investing in a cash ISA, where interest is tax-free. You can invest up to £5,760 in the current tax year in a cash ISA.

The best instant-access ISA currently available is the NS&I Direct ISA which pays 2.25% AER on balances of just £1.

For the remainder of your money above the annual ISA limit, a good option is the Nationwide BS e-Savings Plus, which pays a rate of 1.7%. This account can to be managed online. It accepts a minimum investment of just £1 and allows instant access to your money.

When you need your money, you should take it from the non-ISA account first and leave as much of your remaining money as possible in the tax-efficient ISA wrapper.

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