Ten money-saving tips: Get your savings balanced
MOST of us know that we should have some form of savings in place, whether to have money set aside for a rainy day, for retirement or to cover life events such as weddings and college fees.
But what is the best way of going about it what are the limits and tax considerations to be aware of? Carrie Heron, financial planning expert at Brewin Dolphin in Edinburgh, gives her top tips on getting the right savings and investments balance for you.
1 Cash Isas
A cash individual savings account (Isa) is merely a bank deposit account which allows individuals to save up to £5,640 in the current tax year. It is best to shop around to ensure that you are getting a competitive rate of interest by using the financial pages in the press or websites such as www.moneyfacts.co.uk. Any interest gained on cash Isas is free of tax.
2 Bank and building society accounts
Holding money in a bank or building society account was always seen as low risk as the return was not determined by the equity markets. However, nowadays investors should ensure that the interest offered by the bank or building society exceeds the level of inflation. If it doesn’t, while the capital amount will not reduce, the actual purchasing power of the money will. Again, it is wise to look around to take advantage of competitive interest rates.
3 Regular savings
It is entirely possible to fund for a specific term using a deposit account; however, an investor may want to increase the investment risk. Insurance companies offer regular savings plans, such as endowments, which allow a regular premium to be paid for a specified period of time.
4 Longer term regular savings
Other contracts allow investors to pay a regular premium to the plan, with no end date nominated. An example of this type of plan would be a regular savings investment trust. A more tax-efficient way of saving is to make regular contributions to a stocks and shares Isa, into which you can currently invest up to £11,280. This amount will reduce should you also use some of your annual Isa allowance for a cash Isa.
5 Investment bonds
If you have a lump sum to invest – perhaps following a windfall or inheritance and you want it to grow with the option of drawing an income – a capital investment bond may be suitable. There are a wide range of funds on offer, which are able to suit the risk profile of most investors. The advantage is that you can elect to draw a tax-free income of 5 per cent of the investment amount each year the bond is held. This is a cumulative benefit, meaning you can draw larger sums in the future without creating a tax liability.
6 Offshore bonds
The same rules apply as noted for onshore capital investment bonds, except the contract is with the offshore arm of an insurance company. The offshore status of the contract will mean you can benefit from gross “roll-up” within the investments and can invest in a wider range of investment categories.
7 Equity portfolio
You may wish to have equity exposure and the creation of an equity portfolio could meet your capital growth and/or income requirements. The appointment of a discretionary fund manager would allow a portfolio to be created, taking into account your aims. An investment manager can also take into account the investors tax status whilst investing the capital, especially useful when using up tax allowances prior to the end of the tax year.
8 Taxation issues
You should take tax into account when investing capital on either a regular or lump sum basis. Use of tax-free investment products such as Isas can help you avoid creating an additional tax liability. The taxes to take into account when investing capital are income tax and capital gains tax. However, there are other taxes which can be looked at and these should be discussed with a professional adviser.
9 Inheritance tax
IHT is currently charged at 40 per cent on assets within the estate in excess of £325,000. Although this amount seems quite generous, when we take into account the value of property this level of assets become more reachable. In the case of a married couple or a civil partnership, on the first death all assets can pass to the surviving spouse, without creating an IHT bill. There are many things that can be done to mitigate IHT and a professional adviser will be able to explain these in greater details.
10 Critical illness /income protection
Many people take care of their savings and investments and also make provision for a lump sum payment to their loved ones in the event of their death; however, it may be wise for individuals to review their income and assets should they be unable to work due to an illness or disability. Regular payments to a critical illness or income protection plan could provide a lump sum on the diagnosis of an illness or an income should you be unable to work.
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