Chapter 10 Regular Savings Outside an SSIA

If you are contributing the maximum £200 to your SSIA and you still have money left over, what should you do with it ? First, you should consider reducing your mortgage repayments or increasing your contributions to your pension scheme. If you still have some money left over…

THE STOCKMARKET IS IDEAL FOR REGULAR SAVERS

As we have pointed out on many occasions throughout this book, the stockmarket gives the best mix of high return and low risk.

The risk is further reduced for regular savers. Consider someone with a lump sum on retirement. If they invest it all in the stockmarket in one go, they could be very lucky or very unlucky. If they invest at the best time, when the market it at a low, they will get fantastic returns. If they invest at the worst time, they might have to wait a while to get a real return on their money.

As a regular saver you will reduce the risk even further by diversifying your investment over time. In other words, you will buy your units or shares at a mix of good, average and bad times.

UNIT LINKED FUNDS

Unit linked funds are the best way for regular savers to invest in the stockmarket. But be careful about charges. They can have a drastic effect on your total return. Since the beginning of 2000, fund managers had to disclose charges in a much more open manner and so charges have been reduced. A typical fund charges a bid/offer spread of 5% and a 1.5% annual management charge. But there is a huge range of charges. Acorn Life has a particularly complex system which effectively reduces your return in a 5 year investment by as much as Z%. Other high charging companies include New Ireland,

The cheapest regular savings product is the Quinn Life Freeway. Its annual management charge is only 1%. But they charge an additional monthly policy fee of £2 per month. This sounds small, but on the minimum contribution of £40 per month, it represents a 5% hit. With a projected annual return of 8% a year, this represents more than half of the first year's growth. If you are a long term saver, this is an acceptable cost, but if you cash your policy within two years, it is a real drag on the funds performance.

WITH PROFITS POLICIES

We strongly recommend that you avoid these policies

With profits policies are discussed in greater detail in Chapter 7. In summary, the life company holds back some of the return in good years and redistributes it in bad years. They usually guarantee that if you hold the product to maturity, you will get back your initial investment + any growth.

To provide this guarantee, the company invests about 40% of the fund in gilts and cash which steady the performance of the fund but earn a lower return than equities.

EARLY CASH IN VALUES ARE VERY POOR

It's very difficult to plan ahead, yet many people commit themselves to saving a fixed monthly amount for 15 years or more. This is plainly ridiculous. Over the next 15 years, you might hit hard times and want to stop contributing. Your financial situation might improve and you might want to increase your contributions. Your financial situation might stay the same but you might have a better use for your money - you might need the money towards a car or a house.

The industry won't release figures, but it is estimated that up to 90% of long term savings policies are cashed in before the maturity date !

That makes these risky products. The chances that your financial situation might change is much higher than the chance of a long term slump in the stockmarkets.

THE LONG TERM RETURNS ON UNIT LINKED FUNDS ARE MUCH BETTER

And if you do keep your with profits savings scheme for the 15 year period, the guarantee is worth very little anyway. The likelihood of the stockmarket being lower in 15 years than it is now is very low, so the risk from investing in unit linked funds is really, really low.

And because 100% of a unit linked fund will be invested in equities as compared to 60% of a with profits fund, the long term return on the unit linked fund will be much higher.

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