Introduction: Regular savings can be crucial toyour future financial situation.
And could increase your wealth significantlyif done correctly. There are however a numberof different areas you need to considerwhen making a regular savings contributions. Risk and attitude to risk, Accessibility/liquidity, taxation, suitability, poundcost average.
What is the clients attitude torisk (ATR). How much risk is the client willing to take. understanding the balance betweenhow much risk to take versus the reward. According to SJP “Almost all types ofinvestment carry the risk that their value could fall, particularly in theshort term.
This may be due to stock market fluctuations, changes in interestrates or other factors.” (SJP Website,2018) According to RoyalLondon the “Risk attitude has more to do with the individual’s psychology thanwith their financial circumstances. Some clients will find the prospect ofvolatility in their investments and the chance of losses distressing to thinkabout. Others will be more relaxed about those issues” (Royal London Website,2018) There are a few differenttypes of risk: · Conservative ( Low Risk ) · Balanced (Lower-Medium risk) · Moderate (Medium Risk)· Dynamic (Upper-Medium Risk)· Adventurous (High Risk) What accessibility dose the client have to the funds. Are they easily accessedor are the funds locked away for a certain period of time. How are the funds treated withinthe product.
In terms of taxation and growth. Is the product suitable andaffordable for the clients current situation. Does it make financial sense forthe client to utilise the product. pound cost average. According to the Beaufort Group “‘poundcost averaging’ – or, in laymen’s terms, regular saving – can come into play.
Pound cost averaging works on the basis that putting smaller amounts of moneyinto an investment reduces the overall risk of investing at the wrong time.Compared with sinking one large sum in a single transaction, the risk ismitigated by the fact your smaller, regular sums will buy in over a period oftime at a variety of prices.” (the Beaufort group website,2018) Asset Classes It is very important to look at the assetclasses which you have exposure to, as this will affect the risk which you faceas well as the return which you are likely to achieve. What we want to do in this Document is show youhow to diversify assets provide a healthy income as and when you want/need toaccess your assets. Thekey with any investment is that you must diversify the assets which you hold.When I say assets there are really 5 different areas which you can invest inwithin most regular savings products: 1. Equities/Shares– investments into companies from across the world.
These will carry risk andthe values will change on a daily basis but over the long term they tend tooutperform most other asset classes. 2. Bonds/Gilts –These are essentially a loan to a company for which you receive a return, theyare generally lower risk than shares.3.
Commodities –Refers to raw materials such as gold, copper, coffee etc. They can all go downin value.4. Property –Commercial property such as an office building.
The growth comes from theincrease in the value of the building and the rent which the tenants pay.Property can go down in value.5. Cash – No riskto the value of the investment however your money may be eroded by inflation(the rate at which goods increase in price). For example interest rates arecurrently at 0.
25% and according to BBC “inflation is at 2.3%”( The BBCwebsite) so keeping cash will mean that the purchasing power of your money isdecreasing. Asset classes 1 to 4 allcarry risk to the value of your initial investment and you may get back lessthan you invested. However, they are the only way which you will be able tobeat inflation and ensure that you make a meaningful return. It is veryimportant that any investment you make is diversified across all of these assetclasses as this reduces the risk you face. We will touch on this in more detailin a later section. Different types of products: including Summary, Risk, Taxation andsuitability 1. Deposit based- Bank Accounts: According toWikipedia “A deposit account is a savings account, current account or any othertype of bank account that allows money to be deposited and withdrawn by theaccount holder.
“(Wikipedia2018) as mentioned above although cash has little orno risk your cash savings may be eroded by inflation. However it is a goodplace to keep an emergency fund ( easily accessible cash incase of anemergency) 2. Pension Schemes: according to the Pensions Advisory service “apension scheme is just a type of savings plan to help you save money for laterlife. It also has favorable tax treatment compared to other forms of savings” (PensionsAdvisory Service 2018) while a pension scheme is a long-term regular savingsplan here is a brief example of how a pension works:If you were to have a pension pot of £1M atretirement it would be taxed as Follows:· Pension Pot £1,000,000· 25% Tax FreeCash £ 250,000· 5% tax freeincome £ 12,500· Amount Remainingfor Income £ 750,000· 5% Income £ 37,500· Tax on income £ 5,380· Net Income £ 44,620· Marginal Rate of Tax 10.76% Thepoint here is that if managed correctly you will receive 40% tax relief onpensions, tax free growth and you will only pay 10.
76% when taking money out ofyour pension. Therefore using pensions as a long term regular savings productmakes a lot of sense. The downside is you will not have access to the fundsuntil the age of 55. 3.
Individualsavings accounts (Isa’s): according to GOV.UK “there are 4 types of ISA’s”· Cash Isa · Stocks & Shares Isa · innovative finance ISAs ( mix between cash and Stocks & Shares)· Lifetime IsaIsa are really the first starting point froma Long term savings standpoint as they allow you to invest with the possibilityof tax free growth( Maximum you can invest is £20,000 per year). They come intwo forms; cash and stocks & shares. The great thing about an ISA is thatis grows tax free so it makes sense to put something in there that will have anopportunity for growth. By doing this you will be exposing yourself to assetswhich do carry risk (if investing in stocks and shares) but will undoubtedlyoutperform cash in the long run. overtime equities will outperform cash – thekey is to hold the investment for a minimum of 5 years. After pensions, ISAs are a brilliant way to be tax efficient and asdescribed above this can be a really efficient use of savings income and it canprovide you with flexibility to access the capital should you ever need it.Income from pensions is liable to tax however income from an ISA is completely taxfree.
Therefore this is a great way for you to top up retirement income withoutevery paying higher rates of income tax. With regular contributions you canactually benefit from volatility as it means that you are picking up units ininvestment funds at a lower price. (as mentioned above pound cost average) 4. Unit Trusts: AfterISA’s and Pensions the next place to be saving is into a Unit Trust. According to David Burnell Financial Services “A unit trust isa collective investment created under trust. The trust pools the money ofnumerous individual investors to create a fund with a specific investmentobjective – income, growth, or both.(David Brunell 2018)When making an investment you usually make your return in two ways:· Growth in the value of the share price/asset price· Dividends or Income which is paid out to investorsEach return is taxed in a different way’Growth’ and ‘Dividends’. A Unit Trust is another way in which we can shelterthe majority of returns from tax.
After an ISA allowance you should look atusing your Capital Gains Tax (CGT) allowance. Everyone in the UK has a CGTallowance of £11,300 a year which means you can make gains from investments upto £11,300 and pay no tax on this growth. CGT allowances are like ISAallowances in the fact that you lose them each year, therefore some assets areonly measured against your CGT allowance when you come to disposing of theasset, for example property. However by investing into more liquid assets, suchas unit trust funds, you can get into the habit where you are using thisallowance every year. The way in which this works is as follows:- You hold a unit trust fund and at the endof the tax year we calculate the gain over that year- We then instruct you to make a fund switchto ‘crystallise’ the gain- We then file this on your tax return and aslong as the gain is under £11,300 it is all tax free- If you make a loss in a year we cancrystallise this and you can offset this loss against future gains- After 30 days you can rebuy your originalfunds and the gain is washed away essentially they are washing away their gainseach year so they never have a large taxable gain as you would with a buy tolet. This means that a £100,000 gain over 10 years could pretty much becompletely tax free whereas with other assets this could be as much as losing£17,780 (20% rate) or £25,000 (28% rate) to tax.
In addition, new rule changes mean that thefirst £5,000 of dividends earnt each year will be free of any tax. Thistherefore means that we can set up a Unit Trust investment which, if managedcorrectly, will grow tax free up to £16,300 per annum. Assuming a growth rateof 5% pa.