As interest rates remain significantly lower than they were a year ago, those of us who are in a position to save may feel reluctant to put our hard earned cash into a low paying savings account. However, this doesn’t mean you should let your savings dwindle in a current account or even tucked away under the mattress! Whether you have a small nestegg or larger lump sum, Unbiased.co.uk,the professional advice website, brings you ten top tips on how to get the best out of your savings in the current market.
“Ask your employer if you have access to a Save As You Earn share purchase scheme, or “Sharesave” scheme as they are sometimes called. These allow employees to save between £5 and £250 per month for 3, 5 or 7 years. Employees also get a tax-free bonus if they complete the savings plan. At the end of the period, employees choose to either use the money saved – plus the bonus and interest – to buy shares (if buying the shares would generate a profit) or have their contributions returned plus interest (if this would give the higher return). SAYE schemes offer huge upside potential with very minimal risk. Essentially, if the share price falls during the period, you will still get your savings back plus a tax-free bonus so the only “risk” is the fact that you could have received a slightly higher return through a conventional savings account.”
“National Savings Index Linked Certificates are an ideal way to invest your cash savings so they keep pace with inflation. NS&I Index Linked Certificate pay tax free interest at least equal to the rate of inflation, as measured by the Retail Prices Index (RPI) – so your savings will maintain their spending power. The current certificates are paying 1% over RPI, meaning that if inflation is 3%, your savings increase by 4% tax free, which is equivalent to a taxable savings account paying 5% to a basic rate tax payer and 6.67% to a higher rate tax payer. While the RPI is negative you still receive 1% tax free. You can invest up to £15,000 per certificate and there are two types, 3 year and 5 year. Between a husband and wife or registered civil partners, you can invest up to £60,000 in one go. Backed by the UK Government, NS&I are one of the safest ways to invest you savings. Index Linked Certificates work best for taxpayers to work in conjunction with cash ISA holdings. New certificates are normally released every 6 months, meaning that you can build up a large portfolio of safe, tax free, inflation busting savings.”
“For those investors who are tax payers and are looking for a fixed return over a set term with guaranteed return of capital at the end, guaranteed income and growth bonds are certainly well worth looking into. In a rocky financial climate, guaranteed income and growth bonds can offer a range of benefits. Investors can opt for a fixed term, usually between 1 and 5 years, and they are protected under the Financial Services Compensation Scheme. The first £2,000 is 100% protected and thereafter 90% with no upper limit. This makes it ideal for those investors with more than £50,000 to invest. Income or growth is paid net of basic rate tax but, thanks to the way they are taxed, guaranteed bonds give a better return for higher rate tax payers. To summarise, guaranteed income and growth bonds are ideal for those investors who pay tax and want a fixed return coupled with no risk to capital.”
“Your savings need to be fitted into a properly structured plan aimed at achieving your financial planning goals – this plan will show you how to invest the savings. Firstly, aim to repay any debts first, as these are a drain on your resources. Keep a sufficient amount in cash to cater for emergencies and any planned spending over the next 12 months. If you don’t already have an emergency reserve you should aim to hold around 3 months net income.
After building up a cash reserve, your next objective should be to build up funds to meet medium term (5 year to 10 years) objectives such as education costs, important life events and, special holidays etc. A good investment for these cash reserves in the current market is through an ISA, as the income and gains are free of tax and the capital is fully accessible.”
“Always, always, always consider using your ISA allowance before anything else. Despite their relatively low contribution limits, they still present themselves as one of the most effective savings regimes available. The chancellor announced in his Budget earlier this year that ISA contribution limits were to be increased. From 6th October 2009, individuals reaching 50 by the end of the current tax year will now be able to contribute up to £10,200 each year into an ISA (with up to £5100 held in cash) and this will come into effect for everyone after the 5th April 2010. In addition, recent legislation now makes it possible for those considering an ISA but initially not wanting to invest, to effectively park their savings in cash (subject to limits) and transfer into an investment at a later date. This allows the investor to make sure that they do not lose their annual allowance. However it should be noted that this feature is effectively a one-way ride as the investment cannot be transferred back to cash at a later date. All of these factors should make an ISA, in most cases, an investors’ first port of call when it comes to managing savings.”
“When it comes to getting the best from your savings, not losing any of your cash is a good place to start! Investors should carefully consider the risk of each investment they hold their savings in and ask themselves ‘does this match the risks I thought I was taking?’ The events of the last year have forced consumers to take a closer look at the way we view investments, and everyone should question whether the investment risk being taken is providing the expected reward. By simply carrying out this analysis and discussing all the options (including tax implications) with an independent financial adviser you can avoid considerable losses. This in itself is a massive saving when compared to the losses millions of savers have incurred.”
“For those looking to ensure their savings are always enjoying some of the most competitive rates, look at Moneyfacts data and pick out an account that pays an average of the top five rates on a consistent basis – thus avoiding the need to constantly chase the best rates and hop from account to account. For longer term investors looking to save for retirement, the Government are still offering tax relief at the highest marginal rate (currently 40% and increasing to 50% next year) on contributions to pension plans for those earning under £150,000. This means that if you pay £60, HMRC could pay a further £40. It is very rare that we get something for nothing from the tax man, so it is wise to take advantage of this opportunity while it lasts.”
“When investing your money you should be ruthless about keeping costs as low as possible. A percentage point here and there might not sound like a lot, but over time seemingly small percentage points compound and become a significant drag on performance. Investing in a fund that tracks the FTSE throws up a variety of options to choose from, but let’s take the following example of two funds, the first one, Fund A, has an annual management charge of 1% and the second, Fund B, has an annual management charge 0.25%. Ignoring any other variables, let’s assume that the Fund A grows at a rate of 7% per annum over the next 10 years and that each fund tracks it exactly. In this example Fund A would return 6% annually whereas the Fund B returns 6.75%.
“On an initial investment of £10,000 we might expect the index to return £19,672 because there are no charges to consider. Fund B would be expected to return £19,217 whereas we might expect Fund B to return £17,908 - a difference between the two funds of £1,309. Of course the annual management charge is only part of the overall charging structure so the examples above do not pain a complete picture. However the notional gain of £9,217 from the cheaper fund is more than 16% greater than the £7,908 from the more expensive fund.”
“An ideal savings for plan for children are Child Trust Funds (CTFs). These are long-term savings and investment accounts where the child (and only the child) can access funds when they turn 18. A key advantage of these plans is that there is no tax on income and gains and you can choose where the money is invested. . Furthermore, there is a £250 voucher issued by the government to start each child’s account, and children in families with lower incomes will also automatically get an additional payment of £250. All eligible children will receive a further payment of £250 into their CTF account at age 7, again with children in lower income families receiving an additional £250. These payments will be paid around the child's 7th birthday direct into their account. The maximum contribution into these accounts is £1,200 each year, which can be saved in the account by parents, family or friends. Money cannot be taken out of the CTF once it has been put in and once the child is 18 they will be free to decide how to use the money. Prior to this, children can start to make decisions about how the money is managed when they are 16.”
“Rather than contributing towards education costs or a mortgage, there is an opportunity for family members particularly grandparents to fund Stakeholder pensions for their grandchildren – either by way of a single or regular contribution. Subject to HMRC rules regarding the treatment of capital gifts or regular payments (particularly ‘excess unused income’) there can be Inheritance tax benefits too. There is a huge pension time bomb ahead unless people save for their retirement. Everybody including children can have up to £3,600 invested on their behalf into a stakeholder pension each tax year. Tax relief is available for the child and therefore a net figure of £3,000 will result in the maximum £3,600 contribution. There is a large choice of where the money is invested and with a lifetime of growth the pension pot should be considerable when the child retires.”
David Elms, Chief Executive of Unbiased.co.uk, comments: “As consumers continue to feel their savings aren’t working hard for them in this low interest rate environment, knowing what to do with your nestegg in order to get the best returns may seem like a lost cause. An independent financial adviser is best placed to assist you with your financial planning as they are the only financial advisers that can access products from across the whole of the market. An IFA can work with you to develop an appropriate savings plan that suits you and your overall financial situation.”
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