From piggy banks to PEPs
Baffled about where to put your savings? Nic Cicutti offers some guidance
Wednesday 28 February 1996
Your starting point should be to define why you want to save money, the first stage in the process of deciding where it should go.
Roddy Kohn, an independent financial adviser at Bristol-based Kohn Cougar, says: "Many people who come to us already have a particular purpose in mind. For example, they may be keen on saving for a particular purpose, such as school fees for their children or university living expenses. Knowing where the money will go helps to focus their minds."
Key points to bear in mind include:
Most people need some funds in case of an emergency. It makes sense to stick a few hundred pounds in a bank or building society instant access account.
You should think about retirement planning. This becomes more important as you get older. The sooner you start, the less of your annual income you need to set aside towards your pension.
If you are buying a home or thinking about it, give some thought to whether you want a repayment mortgage or one where you pay interest and save money separately towards the loan. With mortgage interest rates mostly at 7.5 per cent, it may also make sense to divert a lump sum to help pay off a chunk of your home loan.
If you are setting money aside for a special reason, such as a car or a holiday, decide for how long you want to save. Some investments specify that you must leave your money alone for set periods of time.
Are you investing for some stage in the future, in which case you want your capital to grow, or do you need income? There are different investments to suit both needs.
The next question is: do you have a lump sum to invest? If not, are you prepared to save on a regular basis? Don't worry if the amount seems slight. Every little helps and, if invested long enough, can deliver surprisingly good returns.
You will then have to make a critical decision: how much risk are you prepared to accept with your investment?
Mr Kohn says: "Everyone's views are different. There are some people prepared to take a long-term view on Chinese economic performance, or emerging markets in Latin America. Others may not want to take any risks. Neither strategy is necessarily wrong.
"As a rough rule, my suggestion would be that the younger or wealthier you are, the easier it is to accept that some of your money should go into potentially riskier investments. Over the longer-term, say 10 or 15 years, it makes sense."
Generally, among higher-risk investments are unit or investment trusts, which can rise or fall depending on stockmarket performance. Some offer guarantees, blunting the potential upside.
Mid-risk investments include with-profit endowments from insurance companies. They try to "smooth" investment performance, guaranteeing small annual bonuses plus a terminal bonus at the end.
Low- and no-risk investments, albeit at the risk of lower returns, include most bank and building society savings accounts, plus certain index-linked government stocks. National Savings also guarantees its returns. Don't ignore any special insights you may have. Your specialist knowledge of a particular sector, such as the one you work in, can be highly useful.
Next, think of tax. Just as it makes no sense to base an investment decision on taxation alone, you shouldn't willingly hand over your money. Personal pensions enjoy highly favourable tax treatment. If you are in the 40 per cent tax band, for instance, for every pounds 100 you pay, the taxman gives you pounds 40 of that amount. The snag is that if you are young, you will have to wait a long time to benefit.
Personal equity plans (PEPs) and tax-exempt special savings schemes (Tessas) are both tax-effective, but generally at opposite ends of the risk spectrum, with PEPs riskier than Tessas.
One vital point to consider is fund performance. How does it compare with all the others in its sector? Who are the fund managers? Are they likely to stay? Don't imagine that excellent performance equates with top-five status. Consistent placings in the top quarter of funds every year in the past decade is an achievement.
Equally important is the financial well-being of the company you deal with. Will it be around for the remainder of your investing life?
Another factor to consider is flexibility. Can you suspend payments if you hit a rough spot? Is there access to your money in an emergency? Are there any penalties for taking your money out early? Also, what are the charges on the investment?
Finding the answer to these questions may take you time and trouble. Many savers prefer to entrust a professional with the job. Mr Kohn argues: "A good adviser can take a lot of the headache out of your decisions. I am responsible to my clients, though the final decision is theirs.
"If they tell me their needs, I do the work on their behalf. I'm not infallible, but it follows that someone experienced is likely to make less mistakes than a novice."
For details of an independent financial adviser near you, call 0117 971 1177.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
Sony hack: Angelina Jolie branded 'seriously out of her mind' in further embarrassing leaked email saga
Panic Saturday: 13 million Britons spend £1.2bn – while 13 million others across the country live in poverty unable to afford food
iJobs Money & Business
$200 - $350 per annum: Carlton Senior Appointments: Managing Producer Office...
$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...
Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens