ISA Money market vs savings

General
1

HI, I’m new to investengine and I’m still working out what to invest in a stocks and share ISA (UK).

Currently I’m thinking that if myself and wife have £20k each sat in a high interest bank account, wouldn’t it be better to stick that £20k each into an stock&share ISA with a Money market fund (like CSH2) while we decide what to actual invest in in the ISA. ie If the banks are giving us 4% then the CSH2 is more like 5%, but with the benefit its tax free. Plus when I’m ready to move this into some ETFs, its there and ready, but if needs must (worse case emergency) I can just withdraw cash if I need it.

I’m new to this so may have it wrong, but am I right in thinking that a money market fund is safe as savings, AND tax free (up to £20k per year)?

I’ll leave my questions about how many ETFs to choose for another thread. But any advice for this “newbie” is much appreciated.

Ben

2

Hi @bennyuk, I’m curious…if you plan on investing in stocks and/or bonds, why are you holding out?

And to answer your question, money market funds are not as save as savings accounts deposited in the bank.

When you invest, there’s a bid/ask spread which you pay. It’s essentially the difference between the price you buy the shares for and the price they are sold. You can check out these spreads on the LSE website.

Also, money market funds have experienced large demand for withdrawals in the past and they have liquidity issues, so you can’t be guaranteed to get your money out at the time you want it.

There might be other risks but money market funds are safe, compared with stocks and bonds, just not as safe as bank deposits.

As for tax, if you’re saving in an ISA, then all gains are tax free.

Hope this helps.

1 Like
3

In addition to what Carl has said. Your bank deposit likely has a govt gtee on it upto £85k if the bank your deposit is in went bust - doesn’t happen often, but think an event like Northern Trust.

CSH2 is not a money market fund (mmf). MMF’s are highly regulated and invest in a diversified range of mostly bank assets or govt bonds, e.g., certificate of deposits from highly rated international banks. MMF do not have a govt gtee, if any underlying assets lose money it’s possible the end investor will also lose money. I’m not aware of any UK available MMF ever losing money - but it could happen. I’m also not aware of any UK MMF having liquidity issues and restricting investors withdrawals - but again in theory can happen - but this is similar to a run on a bank and depositors not being able to access their cash - rare event but can happen.

CSH2 is an ETF that invests in reverse repo - ie they lend money and receive security in return. So if anything happens to the entity they lend money to, they can sell the assets that they have security on and return investors money that way. The risk is, in the even of a major bank that they’ve lent to going bust - will the assets they have in security be worth the amount of the loan or will there be a loss??

For what it’s worth I hold CSH2 - the risks are very low.

3 Likes
5

Thanks to both, much appreciated.
@Carl I’m dithering about working out whether to DCA over time or go all in now.
Thanks for the details on MMF, very interesting. My question was more about whether CHS2 is a good alternative to a general savings account. It looks like if it 1 -3 months it is fine, or rather better than having it the “Cash” area.

@shrimper ty for the gov gtee details, noted, and ty for the other details.

My next step is to work out my portfolio options. as I’m 52 I’ll be looking for something to hold for 10 - 15 years. So that’s going to be my next task.

Thanks again

7

Weirdly IE does not offer cash ISA, so if you transfer cash ISA from another provider to put in SS ISA, you have to do a full lump sump ETF investment. Is this advisable or are there other options?

8

Morning :grinning: :wave:,

Once the money has been transferred you could move it into the CASH part of your IE ISA and then invest it in chunks of whichever amounts you see fit.

9

Thank you @Pinch , the only issue is IE does not pay any interest on uninvested cash. It seems I will have to put money in MMF etfs.

10

Well… in that case…

Why don’t you get the money into MMF’s and then rebalance slowly from 100% MMF into whatever ETF(s) you want over time?

11

@Pinch, Thank you - yes that is what I will do but was thinking if others have better options.

12

I have Autoinvest set up for both the ISA and SIPP - once my money has been received it gets invested soon after. I have no idea what any market will do - I rather get the money invested and be done with it.

There have, literally, been books written about the best approach of lump sum vs dollar (pound) cost averaging investing - below are but 2 articles.

But, as ever, nobody can make this decision for you - in the end… your money and your sleep at night. :wink:

1 Like
13

I look at DCA vs lump sum like this; if you get paid and you have your regular investment money ready and you invest all of it in one go, that’s really lump sum.
You don’t have the future money yet…