HOW TO INVEST £10K TO LEAVE FOR KIDS
Savings account not the best option if inflation rising faster than interest rate
Q
I WOULD like a bit of advice if that’s ok, as a 75-year-old pensioner? I have £10,000 to spare but can’t afford to lose it through investments and the like. It’s in the bank gathering no great interest, as I hope to leave it to my kids. Do you have any ideas, assuming I have another five years left? I can afford to live off my pension and pension credit until then. I appreciate any comments and hope you don’t mind me writing.
Name withheld
ATHAT’S great to hear that you can survive on the pension income that you have, and that you want to leave the £10,000 you have spare to your kids. It’s also great that you want it to grow as much as it can between now and them inheriting it, although I’m sure that they will all hope that it’s a lot longer than five years before they actually inherit it from you. Can I start my answer by addressing the issue of risk? You have said that you don’t want to, or can’t afford to, take any risk with your spare £10,000. That makes sense. You’ve worked hard all of your life to have saved the money and you want as much as possible of it to get to your children. But you also have to think about the effect that inflation can have on your savings.
If, for example, you manage to find an account that is paying one per cent interest a year then that’s good, because it means that your £10,000 will increase in value by £100 each year as interest is added.
If, however, inflation is running at two per cent, then the increase in the value of your savings will be less than the reduction in value of that money due to the effect of inflation.
What I mean by that is that you will be able to buy less with £10,100 in 12 months time that you can buy with £10,000 today.
You really need to be looking at trying to find an interest rate that is least as good as, if not higher than, the rate of inflation.
That’s not easy to do it today’s savings market since interest rates are so low, and have been for a good number of years now.
It might be that in order to try to get a rate of return that is higher than inflation, you will need to look at some form of investment, perhaps through a stocks and shares ISA.
Yes, that will involve a bit of risk since, as the warnings tell us, the value of your investments can fall as well as rise.
But it may be the right thing to
do, given that although you say you have another five years left you could have substantially more than that.
It might be an idea to have a chat to your children about this.
They are going to benefit from your inheritance at some point in the future and it won’t do any harm to get their views on how you should save or invest that money until they do.
Unless you want to surprise them, which is why I didn’t use your name.
If you still don’t like the idea of any risk at all then you simply have to find the bank or building society account paying the highest rate of interest that you can find. And be prepared to move your money from account to account if the account you are in reduces the rate of interest or if another account comes on to the market offering a higher rate.
And I have suggested an ISA because it is generally a tax-efficient way to invest money but you have to be careful.
Sometimes ISA accounts, and I’m talking about cash ISAs now rather than equity ISAs, offer a lower rate of interest than a standard bank account so don’t restrict your search only to ISAs.
And think about the length of time that you want to tie your money up for.
The longer you invest for, the higher the rate of interest you will be paid
But if your circumstances change and you have to access your money in a hurry, then you might lose some interest.
Another thought, and this one is a bit off the wall, is to give the money to your children now, assuming you are sure you won’t need it.
Then they can decide how they want to invest it rather than leave you to worry about it.