A fully flexible way to invest
Low interest rates are tough on savers. Clare Francis, Director of Savings and Investments, explores the options available in today’s savings environment.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change and their effects on you will depend on your individual circumstances.
Even now with interest rates rising, it’s still a difficult time for savers to get a real return on their money with soaring inflation. However, there are things you can do to make sure your money is working as hard as possible.
Bear in mind that if you owe money on credit cards or personal loans and are paying more in interest than you're earning on savings, it can make sense to pay those debts off before saving further.
It’s important to have some money in an easy access savings account in case something unexpected happens. But, if you have additional money you can afford to lock away for a while, you may be able to earn a higher rate of interest with a fixed-term deposit account from a bank or building society, usually known as a fixed-rate savings bond.
Remember, however, that there will usually be a penalty, often loss of interest, if you want to withdraw your money during the fixed-rate period. The length of time you need to lock your money away for varies as fixed-rate savings bonds are often available for periods of between six months and five years, so you can choose a term that suits you best.
It’s also worth noting that fixed-rate savings bonds are only really suitable if you already have some savings as they often only allow lump sum deposits to be made at the time the account is opened.
You could also consider flexible savings bonds. These are similar to fixed-rate savings bonds, but you have some access to your money, if you need it.
The Personal Savings Allowance (PSA), which came into effect in April 2016, allows basic rate taxpayers (20%) to earn up to £1,000 in interest tax-free this tax year, while higher rate taxpayers (40%) can earn up to £500 in interest tax-free. Additional rate taxpayers (45%) aren't entitled to any PSA.
If you're happy to take on additional risk, you may want to consider investing. Assets have the potential to produce higher returns than cash deposits over the longer-term.
However, this isn't guaranteed and the value of your investments could fall as well as rise, so there’s also the risk that you could get back less than you invested.
Remember too that investments should be held for a minimum of five years, but preferably longer.
The aim is that the investments you put your money into will either provide you with an income or increase in value over time, or both. Spreading your money across lots of different types of investments can help you manage risk, as it evens out the size of your losses and gains.
One of the simplest ways to invest is through funds, which are a type of collective investment scheme where your savings are pooled together with money from other investors and used to buy a group of assets.
So, for example, if you invested in a FTSE 100 tracker fund, you would have exposure to every company in the FTSE 100 index.
As well as offering an easy way to invest in multiple organisations, funds also help spread the risk because whether the value of your investment goes up or down isn't dependent on the performance of a single company.
For example, if you're investing for income, you might choose to invest in equity income funds. These invest in the shares of dividend-paying firms – in other words, companies that share their profits with their shareholders. Bear in mind that dividend payments aren't guaranteed and companies can cut or cancel their payout altogether if they find themselves in financial trouble.
Be prepared to do your research and always consider your investment options carefully. If you’re not sure, make sure you seek independent financial advice.
Making use of your annual ISA allowance can also help boost your savings and investments as returns are tax-free.
This tax year (£20,000 into tax-efficient ISAs. You can split your allowance between a cash, investment, innovative finance and a lifetime ISA1. However, with a lifetime ISA, you can only pay in up to £20,000 allowance.
You can put your money into a combination of these if you want, but you can only pay into one of each of these ISAs each tax year. There’s no income tax to pay on the interest you earn from a cash ISA, which makes them particularly attractive for those with savings income over the PSA.
There’s also no income tax to pay on the interest you earn from peer-to-peer lending platforms if you invest in an innovative finance ISA, and you don’t pay income tax, tax on dividends or capital gains tax (CGT) on any returns from investments held with an investment ISA or a lifetime ISA.
Remember that tax rules can and do change over time. They could be amended or abolished. Also, the benefits to you of any favourable tax treatment depend on your individual circumstances, which may change over time as well.
Regularly overpaying on your mortgage can take years off your mortgage term, leaving you mortgage-free sooner and potentially saving you thousands of pounds in interest.
Mortgage lenders often allow people with a fixed-rate mortgage to overpay up to 10% of their mortgage balance each year. Tracker and variable-rate mortgages are usually more flexible with many having no restrictions on the amount you can overpay.
Don’t make any assumptions, though, because you may have to pay an early repayment charge if you go over any limits on overpayments. So it’s important to check your mortgage terms and conditions, and contact your mortgage lender if you’re not sure.
Offset mortgages are another option worth considering. They let you set your savings off against your mortgage, so you can pay off what you owe more quickly, but still have access to your savings.
Instead of earning interest on your savings, you can either choose to bring your monthly payments down or reduce the amount of interest you pay on your mortgage debt.
For example, if you had a £200,000 mortgage and £50,000 in savings offset against it, you could opt to have your monthly repayments recalculated and based on a £150,000 loan. Or you could keep your repayments as they are and use your savings to reduce the amount of interest you pay because you’d only be charged on a £150,000 debt rather than £200,000. By doing this, you’re effectively overpaying every month, which lets you clear your mortgage more quickly and save thousands of pounds in interest.
However, offset mortgage rates tend to be slightly higher than the rates available on standard mortgages.
Rising house prices have made property a popular option for investors in recent years. And if you have a significant amount of savings, you may want to consider either buying a property outright or using your savings as a deposit for a buy-to-let mortgage.
Returns are available from both capital growth, through rising house prices, and rental income. However, neither of these can be guaranteed. House prices can fall, and your rental income might not match your outgoings, so you need to do your sums carefully before going ahead.
Also, be aware that a number of tax changes introduced on property investments could significantly affect the annual profit you make if you have a mortgage on your investment property. Also, your rental income may be taxable, and as it isn’t your main residence, when you come to sell your property any profit would be subject to CGT. You’ll also pay higher levels of stamp duty for a buy-to-let property – unless you hold the properties in a limited business.
And remember, your property may be repossessed if you don’t keep up with the repayments on your mortgage.
The value of investments can fall as well as rise. You may get back less than you invest.
A fully flexible way to invest
Once you’re confident your finances are in order, you need to start planning your investments. Get started by setting financial goals. Are you investing for growth? Or income? We'll help you answer these questions and more in this section.
If you’re new to investing, knowing where to start can be a daunting task. Here, we guide you through your investment journey, from what to consider before you start, the different types of investment account, which might suit you, and the various asset classes. You’ll also learn why it’s important to focus on the long-term as an investor, and create a diversified portfolio which includes a range of different investments.