Places to Invest Your Money with Low Risk
If you have a bit of cash at your disposal then this article may help to suggest a few slightly alternative saving and investing schemes. You probably know all about cash ISA's and Stocks and Share ISA's, but there are plenty of other options for places to put your money.
These suggestions perhaps for the slightly cautious investor, who is looking to make a decent return whilst trying to keep their cash as safe as possible.
You should consider the latest inflation figures which puts the main rate at 3.1%, but the retail inflation rate is more like 4.2%. With inflation on the up you need to make your money work harder to keep up! If you are a higher rate tax payer then you need to average around 8% income on your capital to keep up with inflation! Even a basic tax payer needs to make around 6.5% to keep pace.
Note that all the details in this article are for information only, we do not endorse any product and you should consult a Financial Advisor before making any investment
Tax Free Bonds
Banks and building societies often release tax free income bonds, these will often pay a fixed rate of interest for a year, but the basic rate of income tax is already taken out of the fund. Halifax are offering a 1 year bond paying 5.08% but the kicker is that you don't pay the starting rate of income tax on it (something to do with it being a life insurance bond), so that takes the effective rate up to 6.25%.
National Savings offer some bonds as well that are completely free of tax. There are two types, fixed interest rates (generally for 2-5 years) and also inflation linked bonds. These pay around 1.1% above the rate of inflation, and always guarantee that you will get a positive return on your money.
Regular Savings
Most banks and building societies offer ‘Regular Savings' accounts with pretty eye popping rates of interest. In the past the consumer has seen rates of 7,8,9 or 10% interest! The catch with these schemes is that you can usually only pay up to £250 a month into the account, and at the end of 12 months the money gets moved into a different (much lower interest) account. This means that over 12 months you can only invest a maximum of £3000, and as the money only earns interest when you deposit it, even a 10% interest rate will only yield £150 in interest. Not only that, there are usually other catches, you might have to open a current account with the bank, and even pay a minimum into that current account as well as the regular savings account. Often missed payments or withdrawals yield hefty interest rate penalties
Nationwide seem to offer the best regular savings account. The rate isn't such a headline attraction at only 6.25%, but this is still significantly better than a normal savings account. However the key advantages of this saving account is that the money is NOT swept into another account at the end of each year. You can still only pay in £250 a month, but after several years you can build up a hefty amount of money earning the higher interest rate. Not only that, the rate is guaranteed to move with the Bank of England base rate until 2010! You can also make withdrawals whenever you like, but this will reduce the interest rate somewhat, however only down to a minimum of 4.25%, still pretty decent for an instant access savings account.
Guaranteed FTSE growth plans.
There are lots Guaranteed FTSE growth plans out there but some of them are much better than others. Typically a FTSE guaranteed bond ensures that you get most (or all) of your money back whilst also offering you some of the grow of the FTSE over a period of time.
Good FTSE bonds offer around 120% of growth in the FTSE over 5 years but as always, there is a catch! You don't get the share dividends! Typically the dividends make up about ½ the money you can make on FTSE 100 shares, so the 120% growth is effectively reduced to around 60%. However your cash is safe! You basically give up some of the gains you could make on the stock market to ensure that your capital is protected.
However if the FTSE does go down over the period of the bond you will actually have lost out somewhat. Inflation will rear its ugly head, so even if you get your money back its value will have decreased somewhat. With a 5 year bond and inflation running at 3% you actually have to make 16% on your investment just to keep up with inflation. Put another way if you invest £10,000 then in five years time it will be worth just £8620 if you do not make any gains.
A key point here is that quite often these schemes are wrapped up into capital bonds, which means you don't pay income tax on the earnings, just capital gains.
Lend your Money
This one is great fun and is pretty much unique. Go to http://www.zopa.com , it may all sound a bit complicated but it is basically a free market where you can lend to people who have signed up as borrowers. You decide how much you want to lend and at what rate, just pretend you are a bank! Zopa is a bona fide site backed by the relevant financial agencies, and there is a lot of risk management involved. You can chose to lend to either A8,A,B, or C credit rated people A* being people with pretty much perfect credit track records and C rated people still being above the population average. You also only lend a maximum of £10 to any 1 person. So if you lend out 10K in total you'll have 1,000 people owing you money. What this does is drastically spread the risk of people defaulting on the loans, and allows you to price in te default rates when making your offers. For example if lending to a A* rated person for 12 months the typical rate on the market is around 6%, but after fees and bad debt the expected return is more like 5.4%. You are free to try to lend money out at a higher rate than this, but market forces dictate that people probably just wont borrow the money from you, they will go elsewhere. At the other end of the spectrum you could chose to offer around 12% to a C rated borrower for 60months, this sounds like a huge improvement over the A* loan but after fees and estimated default rate the return is reduced to more like 8%. By playing around with your rates on offer and taking advantages of various bonus offers you should be able to make 7-9% overall. Zopa are also finding that the default rates are LOWER than their predictions, maybe because people know they are borrowing off real people rather than banks. I'm getting 7.8% after bad debt at the moment.
Another added advantage is that if you sign up (which takes a little while as you get credit checked) you will find out what your credit rating is for free)
Invest in Stocks and Share ISA's
Use a Fund supermarket like Fidelity www.fidelity.co.uk. I understand that you might not want to increase you exposure to the stock market. However fidelity still offers some advantages for you. 1stly you can probably consolidate your existing investments into the Fidelity fund supermarket, this means you can keep exactly the same PEP funds invested with exactly the same companies, but because it is run by Fidelity you'll get a discount on the management and initial charges. You might save yourself up to 1% on initial investments and you'll have the added advantage of being able to see everything online. Fidelity can offer this discount as they special deals from the Fund Managers and offer the funds a hassle-free way of buying/selling/advertising their products.
The second thing to note is that there are a whole host of 'Stocks and Shares' funds out there that are pretty much cash funds. Yes the value of the funds can go up and down but they are typically investing in government and bank bonds meaning that any annual change is single figure percentage points. Funds such as ‘JPMF cautious managed investment fund' and ‘Fidelity Wealthbuilder Target 2010' The idea is that you use your Stock and Shares tax free allowance whilst still investing in pretty darn low risk stuff.
Become a Current Account Whore
It used to be credit cards, swap your credit card every 12 months and get more interest free credit. Now it is current accounts. You don't even have to give up your main current account, just go around all the banks and building societies and take up the best offers they have for opening new accounts. For example Alliance and Leicester offers 6.5% on its current account plus 8.1% on its cash ISA's if you open both at the same time. Lots of catches, max of 3K in the ISA and 2.5K in the current account and you need to pay in £1,000 a month to get the higher rate of interest, but all you have to do is set it all up online, pay £1000 a month into the account and take £1000 a month out of it. Lots of other banks offer similar deals which are typically tied into a regular savings account as well. Yes its all fiddly amounts of money but you could end up with 3 or 4 accounts paying a good 1-2% above the going rate typical rate, as well as other bonuses for signing up.
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Fixed Rate Bonds
Fixed rate bonds offer a slightly higher rate of interest than savings accounts, with the rate fixed for 1-3 years. People are often wary of fixed rate bonds because they are worried that they will get caught out by rising interest rates, however there is a simple way to mitigate this risk.
You can drip feed money into these fixed interest rate bonds, perhaps taking out 1 per month or 1 per quarter. That way if interest rates do rise faster than expected then at least some of your money will be exposed to the higher rates, and of course the fixed rate bonds generally offer a good rate anyway so instant access account rates will have to rise quite a bit before they catch up anyway.
Of course if interest rates increase very rapidly then fixed rate bonds may well mean that you lose out in the long run. Likewise if they decrease then fixed rate bonds are an even better deal.
So what are you waiting for? Get Saving and Investing!
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