Get saving and put an end to the scourge of financial inertia
MILLIONS HAVE a mental block when it comes to understanding money matters and particularly the best ways to invest. As a result, sadly far too many are not securing the optimum terms, not providing adequately either for themselves or their family and not ensuring a sound retirement.
Aside from parents who shirk the responsibility of discussing financial matters, few schools have taken a practical approach to the subject. Financial education only became part of the mathematics and citizenship curriculum at secondary level two years ago.
Perhaps a reluctance to discuss money with work colleagues also has an impact on why 1.71 million people still do not have a bank account, according to research by the University of Birmingham and the Friends Provident Foundation.
Many are concerned that they either are not salting away enough or do not know how best to invest. Investec discovered that a staggering 92 per cent of those under 35 years worry about the long-term consequences of failing to save. Yet successive governments have provided significant tax incentives.
Start by listing your income and outgoings. Evaluate whether any of the latter can be reduced, notably by cancelling subscriptions not used from gym membership to magazines not read but more crucially check if a better mortgage deal can be secured.
Visit an independent financial adviser, not someone employed by a bank or building society unless they are unrestricted in the products and range upon which they can advise. Just like a solicitor or other professional, expect to pay a realistic rate for advice. The days of remunerating advisers through commission is almost over and should now be transparent.
Make discussing protection insurance a priority. This is not just term cover if you should die so as to provide for anyone who depends on you but also income and critical illness protection. The former will pay if for some reason, such as an accident, you are unable to continue working in your chosen role and the latter is to receive payments if a critical illness is diagnosed.
An IFA should ask your attitude to risk and will recommend investment routes depending on your response. Whilst clearly some cash needs to be available for any immediate needs, far better returns can be secured beyond deposit accounts.
As a dramatic example from Fidelity International, if £15,000 had been invested in the FTSE All-Share Index (composed of all the main companies quoted on the London Stock Exchange) 20 years ago, it would be worth £52,965 but only £19,916 in an average savings account. This is a yawning gap of £33,049.
Protect savings through as many tax efficient ways as possible. The key ones are:
Individual Savings Account (or ISA) where up to £20,000 pa can be saved Pension Tax-Exempt Savings Plan through a friendly society up to £270pa or £25 monthly.
As a rough guide, save 20 per cent of earnings to retire on a pension of two-thirds salary at the age of 65, says pension provider Royal London. In the current tax year, most people can contribute up to £40,000 based on their salary.
Do not overlook allowances for children who should be started on the savings ladder. Even a baby can start both a Junior ISA (up to £4,128pa) and a pension. Similarly, there are tax breaks for none or low earning adults which means partners do not lose out.
In the current low interest rate era, savers need to ensure that the returns are higher than inflation as otherwise their money is losing value.
Look for either companies who are paying good dividends, such as utilities, or a collective. This might be a fund with a professional stock picker or a tracker which seeks to replicate a published index.
Among high-paying firms, look at BP with 6.9 per cent, Centrica on 6.1 per cent, HSBC 6.5 per cent and SSE on 6.4 per cent.
One of the best ways to dip a foot into the stock market is to subscribe monthly. This may be from as little as £25 and several fund managers offer schemes with little or no dealing fee.
Look particularly at investment trusts which are funds quoted in their own right which are able to borrow (called ‘gearing’) when they see an opportunity and can hold back surplus profits to even out volatility.
Scottish Mortgage is one of the stars, returning 191.3 per cent over five years by comparison with 103.4 per cent achieved by the FTSE All-World Index. It has an exceptionally low management charge of 0.45 per cent.
For income, look at equity income funds. Tilney, who advise Saga clients, rate both Evenlode Income and Threadneedle UK Equity Income as ‘pedigree picks’ but call Aberdeen UK Equity Income a ‘dog’ fund for its underperformance.
Check that your fund is outperforming, not just mirroring, a known benchmark. This can be free online with sites like Hargreaves Lansdown, Morningstar and FE Trustnet.
Ensure diversity, both geographically and by sector. Bonds are contracts that allow investors to pool together to loan money to a company, government or other institution over a fixed term.
Bond holders receive interest payments during the term and have their initial investment returned at the end. There is a risk that if the borrower fails, the original capital or interest due may not be paid.
Apart from your own home, property can form an investment category. It may be commercial or domestic but the assets depend very much on a professional valuer’s opinion.
In difficult times, there may be a delay before holdings can be sold.
For the more adventurous, look at commodities such as energy, livestock and grain. Infrastructure should pay well in the long term, notably airports, wind turbines and motorways.
As a safeguard, consider investing in a ‘fund of funds’ which means that there is an umbrella collective and specialist funds below it.
Architas offers one: its Diversified Real Asset Fund which is a way to access asset leasing and ground rents through to leveraged loans and timber.
With possibly too much money tied up in the UK, ensure a slice of other markets. In Europe, Jupiter European and Henderson European Focus are strong.
In the US with President Trump aiming to boost business, look at both Old Mutual North American Equity and the HSBC American Index, avoiding Neptune US Opportunities.
For a world perspective, Fundsmith Equity and Old Mutual Global Equity are likely to be strong stars for decades to come.