Time to change savings strategy

AMIDST faint signs of economic recovery, it is time to consider investments.

IN RECENT weeks, there has been a glimmer of positivity in the headlines. According to the Office for National Statistics, the UK economy grew by 0.5% in the third quarter of 2011. Retail sales also rose by 0.6% in September and the Nationwide Building Society reported a slight increase in house prices.

Admittedly, these statistics aren’t fantastic, but considering the current state of the economy and the severe austerity measures being implemented across the globe, these figures illustrate a tentative step forward.

The story remains a somewhat gloomy one for savers though. Interest rates remain low and it’s unlikely that the Bank of England will increase the base rate anytime soon. The average rate for savings at the moment is a sobering 0.1%; this means an investment of £10,000 will garner a measly return of just £10 gross per year.

It’s also worth remembering that your savings are protected by the Financial Services Compensation Scheme, which offers a compensation of up to £85,000 per saver per authorised institution if the bank or building society in question goes bust.

If you are after a stronger return on your money, it may be time to turn away from your high-street savings account and look elsewhere. The best choice of investment for you very much depends on your goals and aspirations. For example, are you looking to save for a deposit on a house, purchase a new car, or contribute towards your child’s university fees? It is also important to think about the tax implications and benefits of the investment you make. You should think carefully about whether you want to pay by lump sum, monthly or annually.

For those who are after a more lucrative return on their money, there are a number of long-term investment strategies that you can explore, each one characterised by its own level of risk.

Stocks and shares are an option worth consideration. Despite the volatility we’ve witnessed just this week, attributed to the referendum announcement in Greece, this is in fact a good time to buy into these markets. Prices have decreased significantly, making shares more accessible to the less seasoned investor.

Although the markets are choppy now – they will go up again in the future, as they did following the downturn in 2008. Think about spreading your money across a range of assets and also consider the geographical spread of your cash.

For example, markets in Europe and further afield in Japan and Asia are potentially rewarding options. Drip feeding money into emerging markets such as India, Brazil and Russia every month is a strategy used by many investors, so that when the market improves, their investment also goes up.

Structured products – also known as protected bonds and guaranteed equity bonds – which don’t put your original investment at risk are increasing in popularity, too.

Potentially, they can provide greater returns than cash-based savings accounts, and many big household names are branching out into these products within the retail marketplace.

So what are the key features of structured products?

The products have a fixed maturity, with your money being tied up for a period of usually five to six years. They tend to be linked to indexes like the FTSE 100 or the price of an asset, such as oil or gold.

If this goes up, then your investment will increase.

The products usually feature a maximum threshold on returns, typically around 65%. So if the index it tracks doubles, you won’t benefit beyond the 65% level. Essentially, you are investing for growth – not income.

The risk lies in the fact there is no guarantee of capital growth and you usually only receive a proportion of the capital gain over the term, not the full gain. It should also be noted that specific terms apply to these products and you must consider these carefully before investing your cash.

For example, some providers offer the full capital back if the index it tracks does not fall below 50% of its initial value at the start of the plan. If the market dips below this threshold and doesn’t recover to the initial value at the start of the term, your original investment is at risk.

It’s important to consult an independent financial adviser (IFA) as investment products can be very complex. An IFA can offer impartial advice and guidance on the various options available by assessing how much can you afford to invest and how long you would like to invest for.

:: Alok Dhanda runs Dhanda Financial, 52 Dean Street, Newcastle upon Tyne, NE1 1PG, telephone 0191 255 8960, email alok@dhandafinancial.com  or visit www.dhandafinancial.com


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