The investors who can't wait for the storm to blow over
If you're nearing retirement, it's no comfort that returns on shares and rates on savings accounts will recover one day. Kate Hughes looks at the options for those who need to maximise their money now
Sunday 11 January 2009
We've been told not to panic about tumbling stock markets – to sit tight, to play the waiting game. With savings rates trivial – and expected to get worse after Thursday's base rate cut from 2 to 1.5 per cent – the advice again is usually to hang in there.
But what if you don't have time to wait? Maximising your retirement income if you only have a few working and investment years left can be an uphill struggle in times like these, because you need your money to work hard in the short to medium term.
Until recently, the assumption would have been that your everyday savings were secure. There have been horror stories, like the collapse of the Icelandic banks, but remember that money held in any bank trading in the UK under the regulation of the Financial Services Authority is protected. In the event of a banking failure, up to £50,000 of an individual's savings are guaranteed through the Financial Services Compensation Scheme (FSCS). If you have more than £50,000 in savings and investments with one bank or building society, consider distributing it among a number of them so you are fully protected. Be aware, though, that if different banks are part of the same financial group – Halifax and Bank of Scotland, say – then that £50,000 cap may still apply.
With all this in mind, you can pursue the best deals for your circumstances – particularly the degree of risk you are prepared to take for your rewards, and how long you plan to keep your money invested.
"In the current climate, cash is king," says Kevin Mountford of price-comparison site Moneysupermarket.com. "But maximising it is another question. You can still get good deals against the Bank of England base rate but really meaningful ones are difficult. Be proactive. Keep an eye on the rates on your savings, especially headline interest offers on instant access accounts as these can drop dramatically overnight, and move your money around where necessary."
For short-term or flexible savings, high-street instant access rates certainly aren't anything special, but if that is what you need then ING Direct currently offers a very reasonable 5 per cent. For the security of a fixed rate of interest and the guarantee of a cash bond, HiSAVE offers a one-year deal of 4.65 per cent for deposits of £1,000 or more.
Tory leader David Cameron recently proposed the abolition of income tax on all savings for basic-rate payers. But in the meantime, you don't want whatever half-decent savings rate you can muster to be further eroded by tax, says Alex Pegley of independent financial adviser (IFA) Calculis. "The first thing anyone should do with their cash, regardless of their age, is use their individual savings account allowance. "Given that they are tax-free and some of the interest rates are fixed, ISAs are the obvious first stop."
Nationwide's two-year fixed-rate ISA offers 4 per cent a year in interest – the equivalent of a taxable rate of 4.8 per cent for a basic-rate taxpayer. In return for that security, though, you are locked into the two-year term.
"Those looking to maximise the value of the cash they save between now and retirement, without exposing it to any significant risk, should look carefully at National Savings & Investments (NS&I) index-linked savings certificates," adds Mr Pegley. "These offer the equivalent interest rate to the retail prices index (RPI) plus a fixed percentage over a specific period. Bear in mind, though, that inflation is expected to drop this year, so your interest rate will fall, at least in the short term."
NS&I has two index-linked savings certificates for lump-sum investments of £100 or more: a three- and a five- year product that both offer RPI (currently 3 per cent) plus 1 per cent.
For those approaching retirement and looking to draw a steady income stream from their investment portfolio, asset allocation is vital, says Darius McDermott of IFA Chelsea Financial Services. "A standard allocation for a cautious investor in this age group is usually 50 per cent bonds, 20 per cent UK equities, 5 per cent international equities, 5 per cent property funds and 20 per cent in cash.
"They should take a defensive position on equities, continuing to ease their way out of this asset class This may be hard to swallow for investors who have lost in the recent market volatility, but it will help reduce risk in the portfolio," he says.
As you reduce your equities, your exposure to corporate and government bonds should increase, to help safeguard your portfolio. Corporate bonds are the investment flavour of the month thanks to their eye-catching returns in a low-interest-rate world. The Henderson Strategic Bond, for example, is not untypical with its current pay rate of 8.8 per cent a year.
But a big influence on your retirement income is what you do with your pension pot at retirement.
If you're about to stop work, your pension won't be going as far as it once did because of falling annuity rates. Shopping around for the best deal is crucial as rates can vary by as much as 25 per cent, which will make a big difference to your monthly income. If you are due to retire in the coming 12 months, buying your annuity now could secure you a better rate.
Should a higher monthly income be your priority in retirement, then experts advise that you forgo taking part of your pension fund as a lump sum. Under Revenue & Customs rules, you are allowed to draw up to a quarter of your personal pension as cash tax-free. But for people with larger pension pots and no immediate need for an income – they may continue working part-time, for instance – then the option exists to keep their pot invested and delay taking any benefits until the age of 75.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Mark Dampier: Woodford’s young companies could be the stars of the future
Money round-up video: Low-rate mortgages; comparison sites; ethical finances
Bargain Hunter: Cut-price radiator reflectors can stop all that heat going to waste
The 10 Best money-saving sites
Bank-beating exchange rates on your international payments
- 1 Renee Zellweger on plastic surgery reports: 'I'm living a fulfilling life and I'm thrilled that perhaps it shows'
- 2 Disney announces new female-led film Moana
- 3 Banksy not arrested: Internet duped by fake report claiming artist's identity revealed
- 4 Australian café owner sparks debate after saying 'No' to having unruly children on premises
- 5 Video: Boxer Vido Loncar brutally assaults referee following defeat
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver 'kicks gay couple off for kissing'
Support for EU membership 'at highest level since 1991 with most Brits wanting to stay in'
iJobs Money & Business
£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...
£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...
£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...
£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...
Day In a Page
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
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village