BUILD THE POT
A bit of financial discipline can reap the rewards, says Conal Gregory
SAVING ON a regular basis brings the benefits of higher interest for a deposit plan and lower volatility in the stock market without having to judge the exact moment to invest. Whilst it is unlikely you will become as rich as Croesus, king of Lydia in 6th century BC, the financial discipline can yield fair rewards.
Contributions can be made with quite low sums, encouraging those who are using spare earnings to create some monetary protection for the future. Over time and almost without realising it, a useful money pot can be built up.
Even those on a low income can start by using the Help to Save scheme. Administered by HMRC, it is available to anyone entitled to Working Tax Credit or claiming Universal Credit with a household or individual income of at least £ 542.88 for their last monthly assessment.
Under the scheme, up to £ 50 monthly can be saved for four years in an online account. Two tax- free bonuses will be paid, each of 50 per cent on the highest balance saved. The money can be withdrawn at any time but this can affect the size of the bonus payment.
All except additional rate taxpayers can benefit from the personal savings allowance. This exempts interest income up to £ 1,000 for basic rate taxpayers and £ 500 for higher rate ones.
In addition to this exemption, other non- dividend savings income – typically bank and building society interest – is taxed at zero rate up to £ 5,000.
To save regularly but pay no Capital Gains or Income taxes, use an ISA. The annual allowances are £ 20,000 for an adult and £ 9,000 for a Junior ISA ( under 18 years). The latter is a jump up from £ 4,368 last year.
Banks and building societies like regular savings for the strong customer loyalty and the boost to cash flow. In return, higher interest rates are offered. However, check:
■ whether rate is fixed rather than variable
■ any penalty for missing payment or requiring a single withdrawal
■ liability if term not completed. The top regular fixed rate is 2.75 per cent with HSBC and two subsidiaries ( Leeds- based First Direct and M& S Bank). From
£ 25 up to £ 250 (£ 300 with First Direct) monthly can be saved but this is only available to existing current account holders.
Without that restriction, West Bromwich and Principality offer one- year fixed interest schemes, paying two and 1.5 per cent respectively. West Bromwich accepts £ 10- 100 monthly and Principality from any sum up to £ 250 but neither allows early access.
For a variable rate, the star offer is Bath Building Society with four per cent available to 16- 25 year- olds who wish to save £ 10- 50 monthly. Two withdrawals are allowed each year. For any adult age, Coventry pays 1.85 per cent on any sum up to £ 500 monthly with early access resulting in a 30- day loss of interest.
Children benefit from enticing rates. Halifax, part of the Lloyds Banking Group, is consistently top with its Kids’ Monthly Saver for those under 15 years. It pays a fixed four per cent on £ 10100 monthly. The next most competitive are Dudley with a variable 3.5 per cent (£ 10- 150) and Barclays with a fixed 3.45 per cent (£ 5- 100).
For a full list of regular cash providers and terms, it is worth checking with Moneyfacts ( subscriptions 01603 476100).
Yet, for the longer term, the stock market will provide a far better return. Unless you are totally risk- averse, the results are dramatically persuasive.
If £ 100 is saved monthly for 18 years in an ISA, the result could be £ 26,080 ( for a cash account paying 1.95 per cent) or £ 37,323 ( assuming 5.5 per cent growth in the stock market).
If a fund combining fixed interest deposits ( Government and corporate) with the stock market appeals, consider the taxexempt opportunities of friendly societies. Up to £ 25 monthly can be saved, which has not increased since 1995 and should now be around £ 48.
Often the funds come with a small amount of life cover but for a better return, opt for one without insurance. A commitment must be made for 10 years but policies can be written for far longer. In addition to yields which can reach 9.2 per cent annually ( Unity Mutual), there can be attractive benefits such as discretionary dental and optical contributions ( Sheffield Mutual).
Saving regularly in the stock market allows beginners to gain the investment habit. “It’s also a good way to invest in certain more volatile areas of the world such as emerging markets,” says Darius McDermott of Chelsea Financial Services.
Even for developed markets, it avoids a rollercoaster ride as the February and March falls showed.
Take care with purchase charges when investing small sums on a regular basis. Some providers and brokers have disproportionately high minimum fund fees such as Hargreaves Lansdown with £ 1.50 for each monthly investment.
With investment trusts, look for those with no such fee. Subsequently, there will be an ongoing management cost plus the platform charge where the security is held.
Aberdeen Standard Investments is a leading example of no charge for its share plans, other than the Government stamp duty on purchases. Its funds include Murray International, which was founded in 1907 and has a strong performance, notably from Asia Pacific and North America. Its
single country trusts include Aberdeen Japan and Aberdeen New India.
Remember that professional stock pickers are not consistent in their performance. Warren Buffett at Berkshire Hathaway saw his fund lose US$ 50bn in the first three months, which was its worst ever record, but it jumped 87 per cent rise in the second quarter, helped by Apple which is its largest stock.
For a collective, check what is really offered, past performance, costs and skills of its manager. ‘ Absolute return’ funds is a
panglossian title. The reality is that only 24 out of 59 such funds have shown any growth over three years and on average they have recorded a loss.
If unsure which stock market investment to choose, ask a wealth manager or an experienced financial adviser but make sure the latter is not restricted in what can be recommended.
Alternatively and not as appropriate as it will not be tailored to your circumstances, consider a ready- made portfolio. Schroders Personal Wealth
launched six funds last month through Lloyds. M& S Bank offers several including high income based on bonds and its UK Selection formed of 35- 45 stocks with at least 80 per cent in shares.
So called passive investing by using a tracker has the twin advantages of very low cost and ease of understanding.
However, it will never outperform the market as the tracker is always trying to catch up and the index mix is not balanced, either globally or by sector.