Make most out of your savings

Feb 6 2010 by Iain Laing, The Journal

INDEPENDENT financial adviser ALOK DHANDA explains how you can get the most from your money by considering alternative investments and taking some risks to reap rewards.

MANY UK savers who have suffered through the economic downturn are now looking for alternative ways to get the most out of their hard-earned money.

Worryingly, half of the UK’s 11 million pensioners depend on income from their savings to supplement their weekly income, according to research by the National Pensioners Convention. More than half (55%) of pensioners are receiving less than £10 a week from their savings.

Additionally, with the substantial fall in property values and the current average rate of deposit interest being only 0.1% (equating to only £10 for every £10,000 invested), it is understandable that savers are losing faith in the current system.

If you’re thinking of taking a new financial step for your savings this year, there are many alternative investment opportunities available. The investment you choose depends on your risk appetite and the time you would like to invest for.

This could be the right time for you to think about paying into a cash ISA, which is tax-free and can be paid monthly or as a lump sum. Cash ISAs will definitely provide a higher rate of interest than a normal bank deposit account. However, with deposit rates as low as 0.1%, you could get a better return by taking a risk and drip-feeding funds into the stock market. Schemes such as Equity ISAs can offer good long-term investment opportunities.

UK Equity Income Funds are still regarded as core to a balanced portfolio, though they are generally riskier than bond funds as they involve mainly investing in shares.

Getting involved in stocks and shares can be an exciting and profitable move, but you should always seek advice o before parting with your cash assets. An independent financial adviser will draw up a risk profile, taking into account your financial position and any associated tax implications.

Those wanting to take slightly more of a risk with their money can also consider corporate bonds, which involve lending money to a company in return for a fixed rate of interest which they return on a set maturity date.

The bond may be worth less when it matures, but high risk bonds (junk bonds) can generate higher incomes if they pay off than low risk or investment grade bonds.

Adventurous investors can also pursue a greater risk strategy through investing in emerging markets. For example, Brazil, Russia, India and China (BRIC) are swiftly proving to be the big four openings for investors. Many of the UK’s largest FTSE 100 companies such as Rolls-Royce, Unilever and Cadbury have exposure to these markets.

In fact, an enormous two thirds of the revenues of listed UK companies come from outside Britain, which proves just how influential the emerging markets are. However, although these investments are attractive and have the potential for a much greater growth rate, they can be volatile, so remember that values can go down as well as up.

FTSE 100 shares with high emerging markets exposure can be ideal investments for private investors, many offering good dividends.

Further investment options include unit trusts, OEICs (open ended investment companies) and investment trusts.

They are considered to be riskier than bank deposits, but can be a simple way to achieve a very diverse spread of investments. They pool investors’ money together in a large shared fund with a professional fund manager, with the aim of delivering the highest returns.

This allows you to invest across different funds and in different sectors without having to spend time managing the investments yourself. It is also possible to hold unit trusts and OEICs within an ISA, so growth is tax free.

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

Half of the UK’s 11 million pensioners depend on savings to supplement their income