Investments: Devising a Savings Strategy
• Aim to save at least ten per cent of your take-home pay.
• Save first for an emergency fund, which can be used for items not covered by insurance: the car breaking down, major repairs to your roof, or a sick mother who needs home nursing. Two or three months’ take-home pay should be enough.
• Don’t put all your savings in one place. Aim for a good spread of different types of savings.
• Don’t put all your savings into buying your house. House prices can fall as well as rise.
• Use a standing order to pay a regular monthly amount into a savings account.
• Look for a long-term savings scheme which makes it difficult to withdraw money, or which imposes an interest penalty.
Which scheme is right for you?
Once you have a savings strategy, you are ready to decide which savings schemes are right for you.
Bank and building society accounts
Instant access accounts
The best place to keep at least some of your emergency fund. Accounts can be opened with as little as £1, and most pay higher rates of interest the more you have invested. Some accounts give you access with a cash card.
• Interest is taxable. Basic rate tax is deducted at source, but if you don’t pay tax, arrange for the interest to be paid with no deductions.
• Interest is paid six-monthly or yearly. With larger amounts you may be able to get monthly income.
Term and notice accounts
With term accounts you agree to invest money for a set period (one or two years, for example) and you lose interest if you withdraw the money early.
With notice accounts you agree to give notice of any withdrawal, usually 30 days or 90 days beforehand. You lose interest if you don’t give notice.
• Interest rates are higher than on most instant accounts. Minimum investment varies, but is generally between £500 and £2000.
• Interest is taxable, and is paid every six months or year.
TESSA (Tax Exempt Special Savings Account)
A tax-free savings scheme available from banks and building societies. There is no tax to pay if the scheme stays in force for five years. Within certain annual limits, money can be deposited in a TESSA on a regular or irregular basis.
• Suitable for anyone who is prepared to save for five years.
• Tax free if kept for five years.
• Interest can be taken as income or reinvested in the plan. Tax is deducted at source if you take income, but is returned in the form of a bonus if the plan is kept up for the five years.
National Savings accounts
Available from post offices, the first £70 of interest is tax free. You can open an account with £5 and withdraw up to £100 on demand.
• Suitable for higher rate taxpayers only, as better interest rates are available elsewhere.
• Interest is paid gross yearly with no deductions; taxpayers must declare interest to the Inland Revenue.
Available from post offices, one month’s notice must be given for any withdrawal. You can open an account with £5.
• Particularly suited to non-taxpayers who don’t need immediate access to their money.
• Interest is paid yearly, with no tax deducted; taxpayers must declare interest to the Inland Revenue.
Available from post offices; terms vary according to the issue. The rate of interest increases the longer you hold the certificates, which run for five years.
Index-linked certificates, also available, increase in value in line with inflation once they have been held for a year, with an additional payment of interest.
You buy savings certificates in blocks of £25. The maximum you can invest depends on the issue.
• National Savings Certificates are tax free, so they are often good value for higher rate taxpayers.
• Any interest is added to the value of the certificate.
Available from post offices, capital bonds last for five years and the interest increases the longer you hold the bond. You buy capital bonds in blocks of £100-£1000.
• Most suitable for non-taxpayers.
• Taxpayers pay income tax each year, even though the interest is only paid when the bond is cashed in or matures.
Available from post offices, income bonds pay a monthly income with no tax deducted at the time. The interest rate is variable and you must give three months’ notice when you want your money back. If you hold the bond for less than a year, the interest rate is reduced.
Income bonds are £1000 each and the minimum amount that you can hold is £2000.
• Suitable for non-taxpayers who need to boost their income.
• Interest is taxable and is paid monthly — either into a bank or building society or by cheque.
Life insurance savings plan
A regular savings plan based on endowment life insurance is designed to run for at least ten years, and offers a small element of life insurance. Safe and dependable, the minimum investment is around £10 a month.
• Suitable for higher rate taxpayers who don’t want income.
• Tax free if the policy is held for at least ten years, or three-quarters of the term if less.
• There may be capital gains tax to pay if you cash the policy any earlier.
SAVINGS QUIZ: ARE YOU A RISK TAKER?
|1. Do you enjoy spending money on yourself?||Yes/Sometimes/No|
|2. Do you know how much money you have in your bank account?||Yes/Sometimes/No|
|3. Do you think playing the stock market is only for the super rich?||Yes/Sometimes/No|
|4. Do you think taxes are too high?||Yes/Sometimes/No|
|5. Do you dread the expense of Christmas?||Yes/Sometimes/No|
|6. Do you worry about losing your job?||Yes/Sometimes/No|
|7. Do you think gambling is a stupid waste of money?||Yes/Sometimes/No|
|8 Do you worry about money?||Yes/Sometimes/No|
If you answer ‘yes’ to all or most of these questions, you have a cautious nature. For peace of mind put your savings in schemes that are safe.
If you answered ‘sometimes’ to most of the questions, you may be prepared to take some risks with your long-term savings.
If you answered ‘no’ to most of the questions, you are one of nature’s risk takers; take care not to risk everything.
Be Tax Efficient
Couples where one partner doesn’t have an income, or where one partner pays tax at a higher rate, should transfer savings to the more lightly taxed partner to take advantage of separate taxation.
Non-taxpayers should put money in accounts which don’t deduct tax from interest payments, or where the tax can be reclaimed.
Unit and investment trusts
Available from unit trust managers, and some life insurance companies, banks and building societies. Unit trusts invest in a selection of companies quoted on the stock market. You buy units in this collection of investments.
The price of units goes up and down depending on the value of the unit trust’s investments. Unit trust prices are quoted in most of the quality newspapers.
Investment trusts are similar, except they themselves are also quoted companies and can be bought and sold. They can be bought through any share-dealing service, such as a stockbroker, bank and some building societies as well as directly from the managers.
The minimum lump sum investment for both ranges from £250 to £2500; minimum for regular savings, £25-£50 a month.
• Suitable for risk takers hoping for a high long-term return.
• Basic rate tax is deducted at source, but non-taxpayers can claim it back. Higher rate taxpayers have extra tax to pay.
• There can be capital gains tax to pay when you sell your units or shares.
• Income is normally paid out every six months; some high-yielding funds offer monthly payments.
Personal Equity Plans (PEPs)
A tax-free stock market plan available from investment managers, unit trust and investment trust groups, and some banks and building societies. Part of the plan can be invested in unit trusts or investment trusts.
The maximum investment is usually raised each year in the Budget. Minimum investment ranges from £500 for lump sums and £25 a month for regular savings.
• Suitable for risk takers planning a large portfolio of shares.
• Dividends are paid every six months and PEPs are tax free.
• There is no capital gains tax on PEPs.