Cash Clinic: Striking the balance between risk and investment on your savings

Q: I am currently saving around £1,000 a month and keeping the money in my current account as savings accounts don’t look very good at the moment. Do you have any suggestions where I could put this to earn a reasonable rate of interest without excessive risk?

AS, Bo’ness

A: If you are not already using your tax-free cash individual savings account (Isa) allowance, you could invest up to £5,340 from your accumulated funds before 6 April. The limit is due to rise in the 2012-13 tax year to £5,640 so a further £470 a month could be invested from 6 April onwards into a cash Isa.

You should, however, be aware that with inflation currently running at more than 4 per cent, you would still be losing money in real terms.

A stocks and shares Isa could be used to the same investment level (or for the full allowance of £10,680), but these generally require you to take some level of risk. You should also consider whether you can invest through a pension plan, where tax relief would be available at your highest rate. Taking advice from an independent financial adviser (IFA) is recommended for anyone with this level of regular savings.

Q: I am a 76-year-old pensioner and have around £30,000 to invest from a recent windfall, but I don’t know where to put my money. I would like some income and reasonable access to the funds with relatively low risk?

GT, Dunbar

A: The answer to this question is largely dictated by the level of income that you require from your investment, your income from other sources and what other investments you have already made.

As you are over age 75, you benefit from an age-related increase in your personal tax allowance. This means that you only pay tax on income over £10,090 as against the £7,475 for people under age 65 in the 2011-12 tax year.

The age related part of the allowance is reduced by £1 for every £2 of income over £24,000. So, any income you receive between £24,000 and £29,230 will suffer tax at an effective rate of 30 per cent.

You therefore need to be careful about how your cash is invested to ensure that you are not paying too much tax. Investing in a cash Isa could generate a tax-free income of up to 3 per cent a year, but you can presently only invest £5,340 in a single tax year.

If you want a higher level of income, you should seek independent financial advice as you will be required to take some level of risk to achieve that. There are low risk funds available and an IFA will be able to make suitable recommendations.

• Steve Johnstone is a financial planning consultant with PKF Financial Planning Ltd

• If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and PKF accept no liability on the basis of this article.