EACH week The Scotsman gives you a top ten guide to pertinent financial issues.
Rising inflation can seriously erode the real returns offered by savings and investments, with the former particularly affected by increases in the cost of living. Nicola Jackson, financial planner with Mazars Financial Planning, offers ten tips on i
nflation-beating saving and investing.
1CASHHunt around for good interest-paying accounts, both on lump sums and regular savings, as the most competitive deals currently available can be up to 10 per cent a year for regular savings and 7 per cent for lump sums. Even after allowing for basic-rate tax, the best rates are therefore paying returns over and above the cost of living. Always check the specific terms and conditions in case part of the return is a limited bonus rate or if access restrictions apply.
2FIXED-INTEREST SAVINGS CERTIFICATESProvided by National Savings and Investments (NS&I), these are low-risk investments backed by the UK government. You can invest for up to three or five years, and receive guaranteed interest payments that are totally tax free.
3INDEX-LINKED SAVINGS CERTIFICATES Also from NS&I, these low-risk certificates provide a guaranteed rate of return, over and above the prevailing rate of inflation. Again, all returns are tax free, but you can only invest up to a maximum of £15,000 per issue.
4GUARANTEED BONDS You invest a sum of capital and receive a "guarantee" that your capital will grow during the investment period. A lump sum, on top of the original capital invested, is returned to you at the end of the policy term. Take care on these, though, as there are many different bonds out there – be sure to read the small print.
5TAX ALLOWANCES AND EXEMPTIONS Ensure you are fully using your tax allowances, as tax eats away at your investment returns and affects the real return against inflation. Use your annual Isa allowances (currently £7,200 in all or £3,600 in cash and £3,600 in equity Isas) to ensure that interest and dividend payments are held in a tax-free environment. Also, where one spouse or partner in your home works, ideally interest and dividend payments should be held in the name of the lowest, or non-paying, tax payer in the household in order to benefit from their otherwise unused allowances. Finally, apart from tax savings on income, you can realise capital gains of up to £9,600 each year free of tax.
6PENSIONS Contributions into pension schemes are made net of basic rate tax, which means that the government pays 20 per cent of the gross contribution. Higher-rate tax payers can reclaim a further 20 per cent tax relief on top of this. Even non-taxpayers receive basic-rate tax relief on contributions, which can be up to £3,600 including tax relief. So for all taxpayers, tax relief provides an immediate return that is far in excess of inflation.
7CHARGES In the same way that any tax reduces your investment returns, so do annual management charges. Now is a good time to review the charges you are paying on your investments, as you may be able to find cheaper alternatives.
8EQUITY INVESTMENT Investor confidence has been shaken by the credit crunch and the global market downturn. However, if you are investing for the longer term (ten years plus), equities are best to provide inflation-beating returns, and are likely to beat other investments, such as cash, gilts and property. Arguably, the best time to buy is when markets are off their peak.
9INCREASED RISK If you're comfortable with investing in more exotic and complicated investments, hedge funds or alternative investments are worth considering. Hedge funds aim to provide solid and consistent investment returns that perform regardless of the economic outlook.
10ASSET ALLOCATION When investing, make sure "all your eggs are not in the same basket". By splitting your investments between the different asset classes (cash, bonds, property, equities), you can spread risk and ensure that you benefit from favourable conditions in all markets. Now is a good time to review your portfolio to ensure your asset allocation is in line with your personal risk appetite.
The full article contains 707 words and appears in The Scotsman newspaper.
