the richest man in atherstone

In May 2006, I opened a Lloyds TSB Monthly Saver paying 8% gross interest for a maximum of two years. I've been diligently putting the maximum of £250 per month into it and the two-year maturity date is now approaching. By my calculations I should have around £7000 at the end of the month ready to reinvest and am now faced with the decision of what to do with it.

I've been looking around at what's available and have narrowed the choice down to the following:

Cash ISA
I think it would be prudent to put £3600 of my cash into my IceSave ISA. If I don't use my tax-free allowance this year, I lose it and IceSave are currently offering tax-free savings of 6.1% with a rate guarantee.

Fixed-Rate Bond
Still with IceSave, they also offer a 7.01% (around 5.6% after tax) fixed rate bond with maturity after a year. This would be the safe option, however I am quite tempted by other slightly riskier options.

Stocks
The recent 'Credit Crunch' has seen many people and firms removing their cash from the stock markets and putting it into safer bonds and savings accounts. This has resulted in a tumble of share prices, which to me looks very tempting at this moment in time. My personal view is that although the economic climate looks a little bleak at the moment, it is not as bad as many experts would have you believe - maybe that's why they're experts and I'm not

I don't believe it is all doom and gloom and now is an ideal time to be picking up a few equities on the cheap. Within a year (or two at most) everything will be back on track and we'll wonder what all the fuss was about - feel free to point out how wrong I was when Britain is in economic meltdown!

I haven't done extensive research but shares in the financial sector (banks) seem to have been hit hardest and two that have caught my eye are Lloyds TSB and Alliance & Leicester. Now, I'm probably biased because I use products from both of these companies and own shares in one of them but they both look tremendous value for money to me.

I've always believed that Lloyds TSB are excellently managed and although they don't always offer the best products, they do offer great customer service and have plenty of capital available to carry them through the rough periods. This is why I use Lloyds TSB for my basic personal banking. I also think their shares have been unfairly hit by the sudden exodus of shareholders and believe they will come back even stronger once the 'crisis' is over. The share price has fallen by around £1.75 over the previous 12 months.

The merits of A+L are slightly different - they tend to offer fantastic table-topping products such as their Premier Direct Current Account, which offers a whopping 8.5% in-credit interest rate. I use one of these for my business dealings. Over the last few years, I've seen A+L systematically release great products with (what seems to me) the strategy of getting their hands on loads of liquid cash which can then be used to lend or invest. This meant that when the money markets dried up (and the subsequent nationalisation of Northern Rock) A+L had plenty of money in reserve. A+L have lost around £7 per per share in value over the last 12 months.

I believe that all the good companies on the various stock exchanges will recover the share value they had around a year ago and more within five years.

Mortgage
One of my goals for this year is to reduce the outstanding capital on my mortgage to less than £60,000. Earlier in the year I had thought of using some of this cash to pay off my mortgage but a recent inheritance has helped me to complete this goal quicker than anticipated. Nevertheless, paying off more of my mortgage is still an option.

Summary
So, I will have around £7,000 to utilise and have to decide where it goes. I think I've pretty much made my mind up that £3600 will be transferred to my cash ISA meaning I have another £3400 to put into a bond, shares and/or my mortgage. I'll let you know what I decide but if you have any better ideas about where to invest a few grand, I'd love to hear them.

Update 6th Oct 2008 - Following the devastating news of IceSave's parent company, Landsbanki, being taken over by the government I have begun to make updates of the situation on my main IceSave webpage.

Following on from my previous post, Landsbanki's IceSave have recently announced their excellent Easy Access ISA. At 6.10% gross (or 5.94% if you opt for interest to be paid monthly), it is the best Mini-Cash ISA on the market. In addition, IceSave will guarantee to beat the Bank of England Base Rate by 0.30% until 31 January 2011 and at least match the Base Rate until 31 January 2013. There is no notice period or penalty for withdrawing your money or transferring it to a different provider in the future. You also have the option of transferring your previous Mini-Cash ISA's by filling in a transfer request form.

The only down-side seems to be that you need to put at least £1000 into it, whereas other products accept as little as £1. However, if you've got a grand or more, I believe that this is the one to choose.

I've been using IceSave's Easy Access Savings Account for over a year now (see my review of this account here) and I've been very impressed with the service I've received and the interest rate, so I'm planning on opening one of their ISA's in the next week or so.

I actually haven't opened an ISA this tax year (I moved house so wanted to keep the cash liquid in case it was required), so hopefully it'll be sorted before the end of March to maximise my tax-free allowance - and then I can open another one!

Once opened, I'll be sure to write a report of my experience.

UPDATE: Five minutes after writing this, I went to the IceSave website and read that because I already had a savings account with IceSave, I could apply for an ISA from their Internet Banking website. I logged on and the whole process was complete in about 2 minutes. I simply declared that I hadn't already opened an ISA this year, chose where I wanted the money to be deposited from and inputted my National Insurance number. I was informed that my ISA would be up and running in two days and I could view it from my existing Internet Banking with IceSave - if only all banks would make it this easy!

I've just received the interim dividend from the 236 Lloyds TSB shares I invested in earlier this year - a total of £26.43 or 11.2p per share.

They originally cost me £1406.33 including fees, so I've seen a return of nearly 2% on them over the half-year I've held them and the final dividend is still to come. The final divi should be at least 23.5p per share, so I'm looking at an extra £55.50 in 2008 all being well. That should create an annual return of around 6%.

I'm pleased with the returns from these shares thus far - much better than my previous foray in the stock market! I'm also happy with the way these stocks have stood up during difficult market conditions - especially for banks.

The plan was always to hold onto these shares for the long-term (around 20 years) and I am confident I'll get an even better return over this period. I also planned to reinvest dividends in more shares but for some reason my online stockbroker didn't do that. It is most probably my fault as I didn't return my dividend reinvestment form until recently.

For this reason, this dividend payment is going into my savings account as it's not worth the broker fees to spend this small amount on further shares.

Lloyds TSB announced an interim dividend of 11.2p this week, an increase of 5% from previous years.

Regular readers will know that I recently bought 171 Lloyds TSB shares at £5.76, so this along with reading the favourable interim results comes as welcome news to me. It reinforces my belief that the company is heading in the right direction and because Lloyds TSB has not risen its dividend for 5 years I feel very confident with my investment.

The 11.2p interim combined with a projected final dividend of at least 23.5p is an annual dividend of 34.7p, which equals a 6.02% yield (5.14% after tax). With 171 shares, I can expect to earn a shade over £59 for the year on a £985 investment.

However, I am quite perplexed as to why the share price is currently £5.54. In my opinion it should be worth around £6, but that's the way markets work I suppose. It's not a trendy stock but the historical performance shows that it is a good investment vehicle. In fact, if I had some cash to spare I would probably buy up a bigger stake - I'm actually toying with the idea of using some of my 'Emergency Fund' to do this.