ABSTRACT: Saving for the future isn't always a priority when you receive that all- important first pay packet. Planning for your future in the short and long term is, however, very important. Simply checking your income and expenditure regularly and giving yourself a monthly budget can help to prevent you from being in debt and reduce the financial pressures that come with it.
Saving for a specific future event is one of the most important financial plans you can make. There are many different types of savings plan, but whatever you decide you will need your investments to grow in real terms and to be worth as much as possible in the future.
However, before you start saving, consideration should be given to clearing any expensive debts or borrowing – credit cards and/or overdrafts, for example – as the interest paid will usually be higher than any interest you receive on a savings account. Remember that interest which is paid out from a savings account will be liable to tax at your marginal rate.
Basic rate tax of 20% is applied to taxable income in excess of your personal allowance, which is currently £7,475. Higher rate tax of 40% is applied to income in excess of £35,000 above your personal allowance, with a 50% tax rate on income of £150,000 and more.
Take care
We all experience the usual bombardment of credit card incentives, store cards, ‘buy now-pay later’ deals, the telephone calls and mail drops and the offer of loans at your bank or building society. Offers like these are fine providing you are certain of the deal you are signing up to, which includes the small print. It is a good idea to take time to make decisions, do your homework and not be coerced or rushed into signing and agreeing to a contract.
It is important you know your personal financial limits – making sure you can realistically pay back the amount owed – and are fully aware of the interest you will be charged and any penalties for late payment. It is a good idea to work out just how much interest you will be paying over the length of the agreement, as you may be paying well over the cost of the actual item in interest alone. Saving first may be more financially viable than entering a loan agreement.
Shorter term savings tend to be for known events or goals, to provide liquidity for emergency expenditure – such as replacing a household item – or simply for peace of mind. A wide range of savings accounts are available from banks, building societies and National Savings & Investments (www.nsandi.com). These accounts are deposit-based, which means that your capital invested has some degree of security and you receive interest.
The net interest return must be more than the level of inflation, in order to protect the purchasing power of your money. Cash deposit rates change on a daily basis and current rates can be accessed from comparison websites such as www.moneyfacts.co.uk
Inflation and investment
The impact of inflation caused by increasing costs within the economy should not be underestimated. The effect of inflation can cause the gradual erosion of both capital and income and it is, therefore, important to invest appropriately to ensure a return, after tax, greater than the inflation rate. The headline inflation rate is a useful guide but you need to consider your own personal expenditure as the major effect of inflation is in retirement and not during ones working life.
An easily accessible reserve or ‘emergency fund’ is important before considering longer term investment plans which require either notice periods or where you expect to invest for a specified timescale. This ensures funds are available when needed without incurring unnecessary penalties or other costs. Typical penalties applied to accessing funds early from a fixed term account would be a loss of interest over the appropriate period.
When investing for the longer term, you will be considering a longer investment period for your money and the potential benefits that could be gained by accepting some risk to capital. Willingness to accept some degree of volatility is an important consideration, balancing the risk of a short-term capital loss against the prospect of greater long-term gains.
It is common for investments to fall into one of the following four asset classes:
• cash – e.g. bank deposits
• fixed interest – e.g. Government and corporate debt
• equities – e.g. company shares
• alternatives – e.g. commercial property.
In order to construct a robust investment strategy a number of factors need to be considered carefully. Your aims, objectives, attitude to investment risk, timescales and individual tax position will all determine the most appropriate strategy to achieve your investment needs.
Someone who is 25 years old will have very different objectives compared to a 65-year old. A younger person is more likely to accept volatility in investments as they do not require funds in the short term, while someone nearing retirement will need to protect their capital values.
Asset allocation is at the core of any successful strategy with suitable diversification to ensure greater opportunities and to limit reliance on any one asset class. For smaller investors it is common to use managed funds in order to obtain a proper level of diversification.
When considering which savings plan to use, it is also important to use the most tax efficient option.
ISAs and pensions
The starting option for most savers is to use their Individual Savings Account (ISA) allowance each year. An ISA is a tax-efficient ‘wrapper’ which can be placed around both cash and investments. The maximum annual ISA allowance is £10,680 and up to half of this can be in cash. As ISA cash deposit rates tend to be higher than normal bank account rates – and you are avoiding tax on the interest – holding cash in an instant access ISA account is the perfect place for that ‘emergency fund’.
For the longer term investor who has earned income, pension contributions are likely to be a suitable option as the Government gives tax enhancements for making personal contributions. If you make a pension contribution of £100, £125 is invested in the pension plan on your behalf.
If your employer offers membership of a pension scheme, it may be that they make contributions on your behalf if you join the scheme. If you do not join the scheme then you will lose this benefit. From 2012, unless employers are already operating a company pension scheme that meets certain requirements, they will need to enrol every eligible employee into the National Employment Savings Trust (NEST) pension scheme.
If you decide to use a pension scheme to save for your retirement, it is sensible to start as soon as possible as any delay can significantly reduce the eventual amount of your pension. With current life expectancy, your period of retirement could last for 20 or 30 years, or longer.
It is, therefore, important that you have prepared accordingly as you could rely on your retirement income for a long time.
However, one has to remember that this is a long-term commitment and the earliest age you can access pension funds is age 55. Remember that the basic state pension is currently only £102.15 per week which highlights the importance of making your own retirement provision.
Other tax efficient options include National Savings and Investment products and Friendly Society savings plans. Investment Trusts offer a very simple and low-cost way of getting exposure to investment markets.
It is
important with any investment strategy to be diversified and not rely too heavily on any one particular option. A successful investment strategy is, therefore, likely to include a combination of different savings plans and include reducing debt, where appropriate.
Finding help
Where do I go for further advice? You will be able to find financial advice from your bank or building society or from an independent financial adviser. You should be aware that an adviser from a bank or building society is more than likely to be tied to the investment products of that particular institution.
You should try and find an adviser who offers to work on both a fee or commission basis and select the most appropriate option for your situation. Obtaining a personal recommendation from friends or family is often ideal. Otherwise, if you are looking for an independent financial adviser, you can search online at www.unbiased.co.uk
Author
James Jamieson
Educated in Edinburgh at George Watson’s College and Napier University where he completed an HND in Business Studies, James Jamieson qualified as an independent financial adviser in 1993.
He joined Williams De Broe as a financial planning consultant in June 2008 and is currently responsible for advising clients on all aspects of financial planning, with particular emphasis on retirement and inheritance tax.
To cite this article use either
DOI: 10.1111/J.2045-0648.2011.00052.x or Veterinary Nursing Journal Vol 26 pp 212-213
Other useful contacts
• Vetlife. c/o VBF. 7 Mansfield Street. London W16 9NQ, telephone 0207 908 6385. infor@vetlife.org.uk. www.vetlife.org.uk/financial_problems
• BVNA Members' Helpline, www.bvna.org.uk
Veterinary Nursing Journal • VOL 26 • June 2011 •