Smart Money Top Ten Tips

WITH interest rates unlikely to rise any time soon, the prospects for inflation–beating returns from cash accounts are slim. But that doesn’t mean you should give up when it comes to your savings. Gregor Munro, financial planner at Johnston Carmichael Financial Services in Edinburgh, shares his tips on getting the best results for your cash.

1 Use your Isa allowance

The individual savings account (Isa) limit for 2011-12 is £10,680, up to half of which (£5,340) can go into a cash Isa or all of it into a stocks and shares Isa. The limit rises to £11,280 (£5,640 for cash) in April. Any savings into an Isa are exempt from tax, which means you receive all the interest or growth with no tax due. You need to use your Isa allowance for this tax year before 5 April. Sit down and decide what it is you would like to achieve from these investments and when you might wish to access them. Then you can start to build an investment strategy.

2 Build up emergency savings

Before locking your money away in a high rate account or savings product, build up at least three to six months worth of salary in an easy access account. This way, you’ll always have money available in an emergency.

3 Little and often

Not everyone is fortunate enough to have large deposits, so save on a regular basis by setting up a monthly direct debit into a savings account or Isa just after you’ve been paid. This gets you in the saving mindset.

4 Watch out for penalties

Some savings accounts have limits on the number of withdrawals you can make and others penalise you for making withdrawals by imposing an interest penalty. They may pay a bonus of say 0.75 per cent interest, but this drops to 0.25 per cent after a withdrawal.

5 Diversify

Use collective funds such as unit trusts or investment trusts to spread the risk across different asset classes such as stocks and shares, fixed interest and property. These funds do involve some risk and you should be clear about your capacity to accept any potential short-term losses should their value drop.

6 Use of the CGT exemption

You can realise capital gains of up to £10,600 in the current tax year without paying capital gains tax. This will be frozen for the 2012-13 tax year and is then set to increase annually by the consumer price index (CPI) measure of inflation.

7 Move investments to Isas

If you have a portfolio of investments with some gains, you could crystallise some of those gains and immediately re-invest the gains back into an Isa if you have not already used your allowance for the tax year. Remember to keep any gains within the CGT allowance of £10,600.

8 Pension contributions

If you don’t have a pension, then start making contributions into either your employer’s pension scheme – if one is available to you – or your own personal pension plan. Contributions attract 20 per cent tax relief for basic rate and non-taxpayers, with higher rate taxpayers being able to claim a further 20 per cent or, in some cases, 30 per cent relief through their tax return. If your employer has a pension scheme to which it also contributes you’re missing out on free money if you don’t take advantage.

9 Use your spouse

Transferring any income-bearing assets to lower earning spouses can help to share the tax burden. This is particularly relevant if the spouse does not use his or her personal allowance or basic rate tax band.

10 Tax-efficient investments

Investments such as venture capital trusts (VCTs) and enterprise investment schemes are worthy of consideration to sit alongside pension and Isa funds, provided you are willing to accept greater risk in return for income, capital or inheritance tax reliefs. They potentially do not suffer the same restrictions in terms of access in the way that pension funds do, and they do provide you with another potential retirement strategy. These are higher risk investments and, as with all investments, professional advice should be taken before proceeding.