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Where are you in Maximising UK tax-free income
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- Lemon Half
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Re: Where are you in Maximising UK tax-free income
WessexBoy,
These days I've been able to structure my affairs so that it doesn't bother me, but I have come close to being caught out. However believe me it can be a embuggerance a long time before one is a martini-sipping millionaire. But please get the experts to comment on details. In particular I don't know about the situation with ETFs. At present (and since inception) capital gains does not apply inside ISAs and SIPPs. The CGT allowance is annual. Remember Parliament is sovereign and can change the rules whenever it likes.
A cautionary tale from memory may illustrate the issue. A year or so ago I did a bed-and-ISA to get some HYP shares into my ISA. That year I also shunted all my higher risk pot (which is several zeros short of a million, I am a very normal level of small time investor compared to many around here) into RDSB as the oil price was low and I was expecting it to increase. It duly started rebounding (see *) and I was feeling quite happy with myself until I realised that I had it all in my trading portfolio and CGT would become problematic. So I gritted my teeth and near the end of the tax year when I knew I had unused CGT allowance I wanted to B&B back into RDSB to reset the starting point on the shareprice. But there is a 30d rule on this and I was unsure if I could both obey the 30d rule and also be a holder on the dividend collecting date. So I sold a chunk of RDSB and bought BP who are a reasonable oil price proxy for me. If someone had made a takeover bid for RDSB I would have been in trouble ......
The lesson I learnt from that was that I should think through where to place my (hopefully) growth shares. So when I made a decision to buy some very speculative HUR shares I did so mostly inside my ISA (of course that means if I make a loss on HUR the loss will be in the wrong place ...). That in turn resulted in me bringing some of my HYP shares outside the ISA to get the right cash in the right place. Which resulted in more trading charges than I really wanted. If I had thought it all through in advance it would have been cheaper, which is why I am bothering to write it down to help others who may otherwise be caught out.
There are other ways to achieve the same end which are far more complicated and beyond mortals like me.
Regards, dspp
* viewtopic.php?f=56&t=4396
These days I've been able to structure my affairs so that it doesn't bother me, but I have come close to being caught out. However believe me it can be a embuggerance a long time before one is a martini-sipping millionaire. But please get the experts to comment on details. In particular I don't know about the situation with ETFs. At present (and since inception) capital gains does not apply inside ISAs and SIPPs. The CGT allowance is annual. Remember Parliament is sovereign and can change the rules whenever it likes.
A cautionary tale from memory may illustrate the issue. A year or so ago I did a bed-and-ISA to get some HYP shares into my ISA. That year I also shunted all my higher risk pot (which is several zeros short of a million, I am a very normal level of small time investor compared to many around here) into RDSB as the oil price was low and I was expecting it to increase. It duly started rebounding (see *) and I was feeling quite happy with myself until I realised that I had it all in my trading portfolio and CGT would become problematic. So I gritted my teeth and near the end of the tax year when I knew I had unused CGT allowance I wanted to B&B back into RDSB to reset the starting point on the shareprice. But there is a 30d rule on this and I was unsure if I could both obey the 30d rule and also be a holder on the dividend collecting date. So I sold a chunk of RDSB and bought BP who are a reasonable oil price proxy for me. If someone had made a takeover bid for RDSB I would have been in trouble ......
The lesson I learnt from that was that I should think through where to place my (hopefully) growth shares. So when I made a decision to buy some very speculative HUR shares I did so mostly inside my ISA (of course that means if I make a loss on HUR the loss will be in the wrong place ...). That in turn resulted in me bringing some of my HYP shares outside the ISA to get the right cash in the right place. Which resulted in more trading charges than I really wanted. If I had thought it all through in advance it would have been cheaper, which is why I am bothering to write it down to help others who may otherwise be caught out.
There are other ways to achieve the same end which are far more complicated and beyond mortals like me.
Regards, dspp
* viewtopic.php?f=56&t=4396
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- The full Lemon
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Re: Where are you in Maximising UK tax-free income
dspp wrote: In particular I don't know about the situation with ETFs.
For the purpose of this discussion, the capital gains treatment of ETFs is no different than for any other fund or share.
You may sometimes see a reference to ETFs having a capital gains advantage. But this is in fact a reference to the situation in the US, where funds are compelled to distribute realised capital gains and therefore an annual CGT liability can arise. US ETFs are effectively exempt from that, for reasons I won't bore you with.
The main tax benefit of ETFs is what I mentioned earlier - there is no stamp duty on them and so a bed-and-ISA transaction will probably be cheaper than it would be for an investment trust.
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- Lemon Quarter
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Re: Where are you in Maximising UK tax-free income
Moderator Message:
ETF's and IT's are not a topic for the HYP Practical board. If you wish to discuss them as part of this I can moe the topic to the Strategy Board. Raptor.
ETF's and IT's are not a topic for the HYP Practical board. If you wish to discuss them as part of this I can moe the topic to the Strategy Board. Raptor.
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- 2 Lemon pips
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Re: Where are you in Maximising UK tax-free income
We have a shared HYP that started life over 10 years ago in an unsheltered account.
It's being gradually being moved to his and hers ISAs, but is taking some time as income is reinvested. The low lying fruit with sizeable capital gains was moved first, but never exceeded the CGT allowance and we are now left with many shares in the unsheltered account that pay a dividend (or not) at the expense of capital erosion. The total return this year to date is -5.6% for example and the purchase cost exceeds the present value by more than £30k, but the dividend income will exceed the new 2x £2k limit and will be liable for tax from next year.
Perhaps a change to a growth strategy would be in order for the unsheltered portfolio, but that's a discussion for another board and it would involve selling low and upset the balance of the HYP that has been treated as one over the three accounts.
It's being gradually being moved to his and hers ISAs, but is taking some time as income is reinvested. The low lying fruit with sizeable capital gains was moved first, but never exceeded the CGT allowance and we are now left with many shares in the unsheltered account that pay a dividend (or not) at the expense of capital erosion. The total return this year to date is -5.6% for example and the purchase cost exceeds the present value by more than £30k, but the dividend income will exceed the new 2x £2k limit and will be liable for tax from next year.
Perhaps a change to a growth strategy would be in order for the unsheltered portfolio, but that's a discussion for another board and it would involve selling low and upset the balance of the HYP that has been treated as one over the three accounts.
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- Lemon Quarter
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Re: Where are you in Maximising UK tax-free income
UncleEbenezer wrote:CGT only becomes a risk (and a "nice to have" one at that) once your portfolio reaches a pretty damn comfortable size. Not an issue for us less-than-millionaires.
I used to think that.
Ten, twenty years down the road and boy, was I wrong. 'Time in the market' is a major factor.
One successful share, one takeover, one steady long-term holding.....
That's all it takes for CGT to become a serious 'issue'. You don't need to be a millionaire!
I now value ISAs as much for CG sheltering as for income sheltering. Indeed, over the past 5 completed tax-years, I have realised more CG in my ISAs/SIPP than outside. Much of it from a plain old simple plodder, held for 22 years with dividends reinvested (Foreign & Colonial IT) - rocket science not required!
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- The full Lemon
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Re: Where are you in Maximising UK tax-free income
77ss wrote:UncleEbenezer wrote:CGT only becomes a risk (and a "nice to have" one at that) once your portfolio reaches a pretty damn comfortable size. Not an issue for us less-than-millionaires.
I used to think that. Ten, twenty years down the road and boy, was I wrong. 'Time in the market' is a major factor. One successful share, one takeover, one steady long-term holding.....
That's all it takes for CGT to become a serious 'issue'. You don't need to be a millionaire!!
There's another factor as well. At some point you may come into a good-sized windfall, say an inheritance, a payoff or a property sale. At that point you will quite possibly have a lump sum that greatly exceeds what you can salt away annually in ISAs.
If you want to invest it (and personally I always do) then you find yourself with a sizeable sum in a taxable account. A taxable account of, say, 500K only needs to appreciate by a little over 2% a year for the resultant gains to exceed your annual CGT allowance.
That said, basic-rate taxpayer (perhaps because they have quit work but aren't drawing pensions yet) might deem it worthwhile to generate some taxable gains while the CGT rate is only 10%. That may not last.
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- The full Lemon
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Re: Where are you in Maximising UK tax-free income
Lootman wrote:There's another factor as well. At some point you may come into a good-sized windfall, say an inheritance, a payoff or a property sale. At that point you will quite possibly have a lump sum that greatly exceeds what you can salt away annually in ISAs.
If you want to invest it (and personally I always do) then you find yourself with a sizeable sum in a taxable account. A taxable account of, say, 500K only needs to appreciate by a little over 2% a year for the resultant gains to exceed your annual CGT allowance.
You live in an utterly different world, where a windfall is £500k.
I think my inheritance of between £3k and £4k is more usual for ordinary people. I've had a couple of payoffs in the same ballpark, but I don't have property to sell.
I can understand a windfall that might take a few years to feed into an ISA. But £500k? You could retire on that and lead a life of leisure. Or work for your own satisfaction rather than to live. Dream on.
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- Lemon Half
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Re: Where are you in Maximising UK tax-free income
I and t'other half sell every year to maximise our CGT allowances.
As has been said, one never knows when one may need to realise a chunk of capital. In our case it was a house purchase.
So it's common sense to suck tax liability out of the portfolio.
For a related reason most of our portfolio is unprotected. When we moved house - a move we had intended never to make - we burnt up our ISAs to avoid CGT. If we had paid more attention to liability sucking that could have been minimised.
Now, we subscribe our ISA allowances from cash on day 1 of the tax year, to have no scope for transferring into tax shelter, although I did move a REIT by Bed & Wife as I am into higher rate.
Our tax-free allowance is used up in the first month of the year.
A nice problem to have, but one that we all aspire to of course.
In future, dividends will be seen as a soft touch by Chancellors of all persuasions. After all, only the 'rich' have dividends.
The takeaway is that one should use all possible allowances whether it currently seems sensible or not.
V8
As has been said, one never knows when one may need to realise a chunk of capital. In our case it was a house purchase.
So it's common sense to suck tax liability out of the portfolio.
For a related reason most of our portfolio is unprotected. When we moved house - a move we had intended never to make - we burnt up our ISAs to avoid CGT. If we had paid more attention to liability sucking that could have been minimised.
Now, we subscribe our ISA allowances from cash on day 1 of the tax year, to have no scope for transferring into tax shelter, although I did move a REIT by Bed & Wife as I am into higher rate.
Our tax-free allowance is used up in the first month of the year.
A nice problem to have, but one that we all aspire to of course.
In future, dividends will be seen as a soft touch by Chancellors of all persuasions. After all, only the 'rich' have dividends.
The takeaway is that one should use all possible allowances whether it currently seems sensible or not.
V8
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- Lemon Pip
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Re: Where are you in Maximising UK tax-free income
Remember that Capital Losses within an ISA cannot be reclaimed or offset.
Cornytiv
Cornytiv
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- Lemon Pip
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Re: Where are you in Maximising UK tax-free income
learning lots: Bed & ISA; Bed & Wife. Of course I have yet to make my Bed but I'll keep that in mind ...
Also, I realised I have asked about CGT before, and now it is sinking in.
Given that I have used this tax year's ISA and, with next tax year in mind, that I have more than £20k, I will turn attention to HYP that pay divi's this year. ['suppose that's for another thread, although I have been cribbing a list of HYPs from previous threads in this section of the forum]
Also, I realised I have asked about CGT before, and now it is sinking in.
Given that I have used this tax year's ISA and, with next tax year in mind, that I have more than £20k, I will turn attention to HYP that pay divi's this year. ['suppose that's for another thread, although I have been cribbing a list of HYPs from previous threads in this section of the forum]
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- Lemon Half
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Re: Where are you in Maximising UK tax-free income
WessexBoy wrote:Given that I have used this tax year's ISA and, with next tax year in mind, that I have more than £20k, I will turn attention to HYP that pay divi's this year.
Dividends incurring no additional tax to basic rate payers are now restricted to £ 5,000 per year, possibly reducing to £ 2,000. With that in mind, investing potentially taxable assets in higher yielding shares makes less sense from a tax viewpoint than it used to, if you have sufficient to invest that you are likely to approach these limits.
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- Lemon Quarter
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Re: Where are you in Maximising UK tax-free income
As well as my ISA and SIPP I have premium bonds and friendly society investments all tax free, building society cash is never going to get near the limits. Spread betting is tax free but I have not been down that avenue as I've yet to incur any tax from my reducing unsheltered holdings.
I still have unsheltered funds and I sell towards the end of each tax year to maximise gains and move the biggest yielders into the ISA, I'm mostly buying low yield growth/value things unsheltered if I have spare funds/reinvested dividends, this should hold my income to within current limits. If/when in a few years time I have made all the provisions I can and then I am liable for a tax bill on unsheltered dividend income I might look at new plans; still there are worse problems to have than paying a reduced rate of tax on my income - 7.5% basic and 32.5% higher and 38.1% additional.
I still have unsheltered funds and I sell towards the end of each tax year to maximise gains and move the biggest yielders into the ISA, I'm mostly buying low yield growth/value things unsheltered if I have spare funds/reinvested dividends, this should hold my income to within current limits. If/when in a few years time I have made all the provisions I can and then I am liable for a tax bill on unsheltered dividend income I might look at new plans; still there are worse problems to have than paying a reduced rate of tax on my income - 7.5% basic and 32.5% higher and 38.1% additional.
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- Lemon Quarter
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Re: Where are you in Maximising UK tax-free income
I made the mistake when I first started of running a HYP and a tracker side by side as a comparison. I was investing £100 per month into a L&G FTSE all share tracker in an ISA and variable amounts into a HYP. The tracker was sheltered in an ISA and the HYP investments not, and the £100 a month didn't use the whole ISA allowance for a few year which was a mistake . I eventually decided that the HYP was the way to go, and concentrated on the HYP which I then put in an ISA, however it means I have significant holding outside an ISA that produce rather more dividends than I'd like unsheltered. They are less than the £5000 dividend allowance, but more than the £2000 it may become next year. So this year I used my ISA allowance to start bed and ISAing some of my unsheltered shares. I'll do the same at the beginning of the next tax year and hope to get the unsheltered dividend income below £2000. It does mean that this year I invested less than usual - but that was useful as I had cash available for a new car when I needed one.
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- Lemon Quarter
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Re: Where are you in Maximising UK tax-free income
UncleEbenezer wrote:You live in an utterly different world, where a windfall is £500k.
You could retire on that and lead a life of leisure. Or work for your own satisfaction rather than to live. Dream on.
But Eb, I'd hope that this were an inclusive space for discussion. Some of us have been lucky, or 'lucky' in the sense of 'luck is when preparation meets opportunity'. If someone has been saving and investing for possibly decades then these might be the kind of figures that are in play.
I don't think it matters what the absolute sum is, if you're of the mind-set to be here on this forum pursuing these strategies then tax-optimisation is an equal goal. If anything it becomes more of a challenge the more you've accumulated so far.
I wonder what a proto 'Sid and Doris' LTBH couple from the 80s privatisations would be worth now, especially after say selling off a BTL, and downsizing from their sea-view family home; I expect they might be residing in 'a different world' rather than just securely getting by in Bognor
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- Lemon Half
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Re: Where are you in Maximising UK tax-free income
kempiejon wrote:
As well as my ISA and SIPP I have premium bonds and friendly society investments all tax free
Can I please ask how you find the premium-bonds side of things working out?
I ask for two reasons -
1. To check on your thoughts regarding the actual return on them. Is it 'as expected'?
2. To check if you carry out many 'transfers' between cash/PB's/cash/PB's etc.
The reason I ask both of these questions is that I've got a chunk of capital sitting as cash as an insurance against a large market-downturn, where I'd expect to then drip some of those funds into the market, but I'm acutely aware that carrying out that type of insurance with 'pure-cash' in a broker account is a really inefficient way of doing so, especially (and importantly to me...) as it raises the level of funds held with that broker to levels that I'd prefer not to have to do so, if a suitable alternative were simply available.
My thoughts, depending on feedback from anyone who might do something similar, would be to park the vast majority of that insurance-capital into Premium Bonds, and dip into that if required, depending on market movements. If the transfers between cash/PB's/cash/PB's is really simple and efficient (all carried out online, and at short timescales?), and the returns are comfortably above the 0% I'm currently 'making' on the funds, then this is a plan I'll actively look into carrying out.
Cheers,
Itsallaguess
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- Lemon Quarter
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Re: Where are you in Maximising UK tax-free income
Good question, I was considering something similar recently. 'What if you've excess funds in your HYP, want to move them elsewhere, but don't know where to re-invest them for the medium-term?'. Cash pays almost nothing, bonds are high and only going to drop as interest rates rise...
re: premium bonds, I have previously held some. Check the 'implied yield' with some care, as IIRC you don't get entered in draws until you're invested for a month. Then the 'headline%' likely presumes holding for quite some time; as I held say £20k worth for a couple of years and AFAIR got 2*£10 or £50 in return - what ever the overall return was, it was well below RPI%.
re: premium bonds, I have previously held some. Check the 'implied yield' with some care, as IIRC you don't get entered in draws until you're invested for a month. Then the 'headline%' likely presumes holding for quite some time; as I held say £20k worth for a couple of years and AFAIR got 2*£10 or £50 in return - what ever the overall return was, it was well below RPI%.
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- Lemon Slice
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Re: Where are you in Maximising UK tax-free income
It doesnt need to be a windfall. I had a holiday property that I sold after getting bored with going to the same place too frequently. It wasn't possible to put the proceeds all out of reach of HMRC because of the ISA allowance and I didnt bother in subsequent years as there was no tax for me to pay on the dividends as a basic rate taxpayer. Last year end was a wakeup call when spreadsheet Phil decided to grab a bit more, and then there was the complex issue of CGT to steer around. However, next April will see me salt away the last bits out of his reach hopefully. I did an exercise to see how much tax from all sources we actually pay out of our retirement income (VAT, Council Tax, APD, etc etc), it was about 30% which is quite enough!
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- Lemon Quarter
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Re: Where are you in Maximising UK tax-free income
Itsallaguess wrote:kempiejon wrote:
As well as my ISA and SIPP I have premium bonds and friendly society investments all tax free
Can I please ask how you find the premium-bonds side of things working out?
I ask for two reasons -
1. To check on your thoughts regarding the actual return on them. Is it 'as expected'?
2. To check if you carry out many 'transfers' between cash/PB's/cash/PB's etc.
...
Hi itsallaguess,
I've held some of my cash in Premium Bonds for probably at least 15 years now and have been happy with that decision. I see that NS&I is quoting the current yield as 1.15% but personally I discount all possibility of winning any but the smallest prize which used to be £50 but for quite a few years now the smallest prize has been £25. The chance of winning a prize is quoted as 1 in 30,000 so if you have £30,000 invested and have average luck over a year then you will most probably win 12 x £25 = £300 for a tax free return of 1.0%.
In my view holding small amounts of cash in PBs doesn't make sense because then the probabilities start to fall apart, it's only once you get to tens of thousands of pounds when you can realistically expect to assume you will win at least some prizes each year. I actually have the full £50K in PBs and I won 6 £25 prizes this month but then I won nothing in July and September and only 1 £25 prize in both June & August. I think the biggest prize that I've ever won was £500 years ago. My total winnings over the last 7 months(*) have been 12 x £25 = £300. doing a 12/7 on that to estimate what 12 months might bring gives me an estimated £514 in prizes so essentially I'm bang on course for that 1% yield on my £50K.
I can't help you with 2 I'm afraid, I leave the cash in there as my last ditch financial defence before having to sell my house to downsize if things ever went disastrously wrong with all my other investments.
(*) Sorry, I don't keep records so I only have the history that the NS&I online prize checker gives me.
- Julian
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- The full Lemon
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Re: Where are you in Maximising UK tax-free income
DiamondEcho wrote:UncleEbenezer wrote:You live in an utterly different world, where a windfall is £500k.
You could retire on that and lead a life of leisure. Or work for your own satisfaction rather than to live. Dream on.
But Eb, I'd hope that this were an inclusive space for discussion.[...]
I don't think it matters what the absolute sum is, if you're of the mind-set to be here on this forum pursuing these strategies then tax-optimisation is an equal goal. If anything it becomes more of a challenge the more you've accumulated so far.
Can't argue with that. Nor would I wish to.
My intention was merely to follow up to my earlier post, in which I'd pointed out that CGT is simply not an issue until you pass some quite significant level of wealth. For some of you it is a consideration; for others of us it isn't.
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- Lemon Quarter
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Re: Where are you in Maximising UK tax-free income
[
A bit OT sorry
The actual return is indeed as expected, it's lumpy but most months a £25 prize, some months nothing some months a handful. I expect sub 1% and get it. I have filled cash into interest paying current accounts, regular savers and the balance into PBs. I have only moved out of premium bonds a few times. It is easy to do online. When I pay back in I sit out the draw until the following month so there’s an initial drag on return. It is better than nothing and your money isn't tied up.
Itsallaguess wrote:kempiejon wrote:
As well as my ISA and SIPP I have premium bonds and friendly society investments all tax free
Can I please ask how you find the premium-bonds side of things working out?
I ask for two reasons -
1. To check on your thoughts regarding the actual return on them. Is it 'as expected'?
2. To check if you carry out many 'transfers' between cash/PB's/cash/PB's etc.
Itsallaguess
A bit OT sorry
The actual return is indeed as expected, it's lumpy but most months a £25 prize, some months nothing some months a handful. I expect sub 1% and get it. I have filled cash into interest paying current accounts, regular savers and the balance into PBs. I have only moved out of premium bonds a few times. It is easy to do online. When I pay back in I sit out the draw until the following month so there’s an initial drag on return. It is better than nothing and your money isn't tied up.
Last edited by kempiejon on November 7th, 2017, 8:11 pm, edited 2 times in total.
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