How to make the most of your savings
Carol Willment is a 65-year-old widow from Weston-Super-Mare, Somerset. She used to work in the health service, but retired early due to injury and now works voluntary shifts as a driver for patient transport, for which she receives £1,000 a month to cover expenses such as petrol.
She receives the state widow's pension of £169 a week and has an NHS pension of around £53 a week. Carol lives in the same house as her son, which they have split into two separate flats.
She's the owner of the property, which is worth approximately £230,000, and has no outstanding mortgage.
In terms of savings, Carol has a regular premium individual savings account with LV=, which she pays £40 a week into. She also has a stocks and shares ISA with AXA, which is currently worth £19,325.17.
Carol wants to maintain a good standard of living into her old age, but is not sure how to make the most of her money.
The first thing Sally Thompson, independent financial adviser at Sage Independent Advisers, based in Weston-Super-Mare, established was how much Carol should have in a readily accessible account.
Carol felt a cash reserve of approximately £6,000 would be adequate cover for any unexpected expenses, so Thompson suggested she maintained this rather than the £37,000 she currently has.
She identified that Carol's main objectives are to achieve capital growth over the medium to long term, to take advantage of tax-efficient investments and to generate higher returns from her capital than a bank or building society deposit account could offer.
To find the best route for Carol to achieve this, Thompson went through a risk assessment with her.
This showed that Carol is a balanced investor, who Thompson describes as "someone who would like to take advantage of equity investments with the potential for good long-term gains but who can accept increased short-term volatility".
Thompson therefore recommended Carol hold a diversified portfolio, which could include everything from cash and bonds to stocks and shares.
She adds: "Carol currently has what appears to be a fairly well-diversified portfolio but she hasn't had any recent reviews.
"I would advise her to conduct an in-depth review of her portfolio to ensure she maximises her investments and minimises the amount of tax she pays. Over the years, what may have appeared to be a good choice at the time, may not be so now."
Ways to maximise savings
One example Thompson gives is Carol's cash ISA, which may no longer be providing a good rate of interest. "If necessary, Carol's ISA can be transferred straight to another provider to avoid losing the tax-free status."
The best way for Carol to do this would be to find an ISA that suits her needs and, assuming it accepts transfers, approach the provider to request it to take care of the paperwork.
Since HM Revenue & Customs introduced new guidelines in 2008, transfers have been much smoother, but she should bear in mind that she can only transfer her current tax year allowance in full, whereas previous year's ISA savings can be split between accounts.
She should also make sure she uses her full ISA allowance for the current tax year (£10,200) by investing in more stocks and shares.
Thompson says: "I've recommended an ISA in order to provide Carol with capital growth potential while making use of the valuable tax concessions."
At the moment, Thompson recommends she picks a growth fund, such as the M&G Recovery or Henderson Multi-Manager Growth fund.
However, if Carol is seeking income further down the line, Thompson says she could easily switch to an income-generating fund – for example, the M&G Income or Henderson Multi-Manager Income and Growth fund – while maintaining the tax protection offered by an ISA.
"When choosing a product or fund Carol should consider the charges, performance and financial strength of the company, as well as the size of the fund and its volatility, the experience of the fund manager and its administration," adds Thompson.
Next, she says Carol should review the investments she's already got to ensure they're still achieving her objective and continue to suit her attitude to risk. By doing this she can decide if she wants to move her money or switch to different funds offered by the same company.
She'll also be able to decide if she wants to put some of the cash sitting in her current account into one of her savings bonds – or another type of product.
In terms of taking an income from her fixed-rate investments, Carol can elect to do so monthly, six-weekly, quarterly, four-monthly or annually.
"As long as her withdrawals don't exceed the rate of growth, her investments will still have the potential to increase in value," says Thompson.
"However, by reinvesting the distributions, their growth potential will be enhanced still further – although she must bear in mind that the value of investments can fall as well as rise."
All proceeds from Carol's fixed-rate savings bonds will be net of income tax and are not liable for capital gains tax since both will have been paid within the fund.
Thompson says the bonds won't need to be declared on Carol's tax return either, provided the income she takes is not in excess of 5% a year, and as long as the reinvested distributions don't exceed 5% a year.
Thompson adds that bonds also have an added flexibility: they can be put into a trust to assist in inheritance tax planning, either at the initial application stage or at a later date.
But she advises Carol to seek expert advice if she decides to set up a trust because access to capital could be forfeited, or it could fall back into her estate, depending on the date she sets it up and the date of her death.
Carol found the makeover worthwhile and says Thompson was very efficient. "I was very impressed; she gave me some good pointers," she adds.
Sally Thompson is a certified financial adviser for Sage Independent Advisers (01934 811 945)
If you would like a money makeover from Moneywise, get in touch here, and you too could meet up with an IFA in your area.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.