Where and how to save
It's true that recent years have been tough for savers. Interest rates have been low while many stock market investments have lost money. Here are some tips for improving returns and/or keeping down risk:
Cash ISAs pay some of the highest returns around on savings accounts. Better still, the interest is tax-free, and so worth more than from ordinary savings accounts, particularly for higher-rate taxpayers.
Investing into the stock market on a monthly basis rather than in a lump sum reduces the risk of being caught out by a crash. If the market falls then your next monthly sum will be buying at a lower price, giving you more chance of making money over the longer term.
A range of unit trusts, ISAs and other investment funds offer low-cost monthly saving schemes which allow investors to drip-feed money into the stock market and benefit from this ‘pound cost averaging’ effect.
Long term savers can refine this benefit even further by increasing the amount they save in months when markets are low.
Taking a long term view and spreading your money widely – putting it in a fund rather than all in one company’s shares, for example – will also help safeguard money you put in the stock market.
Lower risk stock market investments can offer share-based returns with some protection against the risk of falling prices.
One thing Britons are not short of in the world of savings is choice: there are literally thousands of savings products on offer from hundreds of financial companies. Here are the main categories and some idea of who they might be suitable for:
Bank accounts: Some bank accounts – particularly those operated over the internet – will pay interest rates as high as many savings accounts. You could find it convenient to use the account your pay-cheque goes into, and which you use for spending, for saving as well. But equally it could be confusing and you could lose sight of your saving goals.
Savings accounts: Again, many of the best-paying accounts will be operated over the internet. Nowadays 30-day or other notice accounts often pay little or no more than instant access deals. Fixed-rate accounts and bonds will generally pay more than ordinary variable rate savings accounts but they will require you to tie up your money for anything up to five years. Many savings accounts have introductory bonuses. Savers attracted by these initially high rates need to keep an eye on the rate once the bonus goes.
Cash ISAs: Many of these pay relatively high interest rates, with the advantage of that interest being tax-free. But you can only invest up to £5,640 for this tax year (2012/2013), and having a cash ISA will reduce the amount you can save in stocks and shares ISAs.
Friendly Society Savings Schemes: Friendly society tax-efficient savings schemes benefit from an unusual tax concession which allows savers to put away up to £25 a month, or £270 a year, tax-free.
National Savings & Investments: National Savings & Investments also have a range of accounts and bonds which are particularly useful for higher rate taxpayers. There are many types of National Savings and Investments products available and information can be obtained from www.nsandi.com.
Bonds: This is an overused term in the world of savings. Generally implying some level of security for your savings, bonds can vary hugely in their riskiness. Your original money may or may not be guaranteed, returns can be fixed or linked to the stock market – or even a combination of stock market indices. Some bonds will not suit non-taxpayers because they automatically deduct tax from returns. Corporate bond funds have been a popular choice for ISAs, but are suited mainly to those wanting immediate income.
With-profits bonds are linked to the stock market and other investments, and are designed to reduce the investment risk by delivering returns through a series of possible annual ‘bonuses’.
Gilts: These are government bonds. The great attraction is the security of their returns, which are backed by the government. If you buy a gilt and hold it to maturity you know exactly what income and return you will get. But gilt investment funds and gilts traded in the market do not offer these guarantees.
Unit trusts/investment trusts/oeics: These are all types of investment fund, where your money is pooled with that of other savers and invested by a professional fund manager. Generally these funds invest in the stock market. With more than 1,000 to choose between from dozens of investment companies, it is possible to find funds investing in the most exotic stock markets and the most complex financial instruments. So-called hedge funds, whose main claim to fame is to be able to make money even when markets fall, can be extremely complex.
Stocks and shares ISAs: Most stocks and shares ISAs are a way to invest simply in funds free of personal tax. You can invest up to £11,280 for this tax year (2012/2013) into one of these stock market ISAs, unless you have already taken out a cash ISA in which case, if you have invested say £5,640 in the cash ISA, you are restricted to £5,640 to be invested in a stock and shares ISA.
Individual shares: Stock markets should always rise over the long-term but individual shares can be very volatile and sometimes even lose all your money. If you are saving for the short-term you should never invest in shares or in any other stock market scheme – you should only consider this option if you can afford to tie up your money for at least five years (and still accept that you might not make a profit even after that period). Building an investment portfolio of a range of shares is a bit like having your own fund, but without the experience or expertise of a professional manager of, say, a unit trust.
Pensions: A big plus for pension plans is the tax relief – a higher rate taxpayer effectively pays just 60p for each £1 in their pension fund – and the fact that, if the pension scheme is linked to your job, there is a good chance your employer will also be putting in money on your behalf. The ability to choose how your pension fund is invested is also increasingly common.
Where to get advice
Don’t worry if you’re confused: that’s where an independent financial adviser can help out. IFAs can find the most appropriate savings products for your needs and outlook and help you to take a step back and assess your spending.