By Warren Shute
Yes, there’s the threat of negative interest rates on top of the already lowest-ever rates we have now. And headlines focus on the sensational or negative because, as the old adage goes, that’s what sells newspapers.
But the reality isn’t quite so one-dimensional. In fact, quite the opposite.
Because while words like Covid and Brexit might be new, the position we’re in is anything but — from a money perspective at least. Crises have been around since investing began — with wars, depressions, terrorist attacks and more.
That means we have insights from the past, along with current thinking, to help us continue to build our financial security even in these tough times.
How can we do that? Like so much of life, it all begins with our mindset.
Focus on what you want, and what you can control. You can’t control the wind, but you can change your sails. See things how they are, not worse than they are. When things are difficult, you need a plan and something to focus on to take you out of the rut.
That’s when using something like a budgeting template can help you to set clearer goals — so you have a better idea in your mind of what you want to achieve.
Think long term
Look beyond the immediate future: think 10 years, not just 10 weeks. It pays to consider what you’re doing with your money now, to make it work harder for your future.
We don’t get in debt overnight, it takes months or years of overspending, and the same is true of getting rich. It’s a case of building new habits over time to build wealth.
Rainy days can arrive any time
If 2020 taught us anything financially, it’s that the unexpected can happen at any time. And that’s why, even if you’re currently in debt, saving an emergency reserve of £1,000 should be a priority. Having the safety net of emergency savings is so important, because we never know what’s around the corner.
If you’re debt free, extend your emergency fund to between three and six months of expenditure. Think about keeping the money somewhere out of reach — in a separate account, maybe — but also in a place that you can get to it quickly if and when you need it.
Saving for your future
Beyond your emergency fund, where should you save your money? There are several options, depending on your circumstances and your goals. Each has advantages and disadvantages depending on what you’re looking to achieve. Your choices include:
Holding your money in a savings account gives you easy access to it and a level of guaranteed FSCS protection if you use safe and reputable providers.
That level of safety can be a particularly attractive option during a downturn, or if you’re likely to need your money in the short term.
One thing to keep in mind is that with the Bank of England interest rate at a record low of 0.1%, savings accounts can struggle to keep you ahead of inflation, or keep your capital growing.
With tax-free saving, typically no penalty for withdrawals, and no fees, cash ISAs have proved popular since they were introduced to the market in 1999. When interest rates were higher, they offered a great way to save — albeit with a capped annual limit (currently £20,000).
But like savings accounts, in this era of low interest rates they are a safe, but less rewarding, option for your money. Which of the two better suits you depends on your circumstances and needs.
Stocks and shares ISAs
Unlike the safety of their cash equivalent, stocks and shares ISAs invest your money into the stock market. That can mean greater returns — but it also means taking a risk and paying a fee.
As your money will be invested in the markets, you should only consider this type of ISA if you’re thinking longer-term. i.e. you don’t need your money for at least five, and preferably seven, years. That way, it has time to ride out the inevitable peaks and troughs along the way.
The potential advantages of a stocks and shares ISA are greatest if you’re a higher rate taxpayer, or you need your money before retirement, or if you’ve maximised your pension allowance for the year. That’s because all profits are exempt from tax and they can be accessed at any time.
As with any investment, it’s important to be aware that your capital can go down as well as up and you may get back less than you invested.
Lifetime ISA (LISA)
A highly attractive option for anyone aged 18 to 40 years old, a LISA lets you pay in up to £4,000 annually and get a 25% bonus from the government each year.
The catch? You must hold the account for 12 months to retain the bonus and the money that you save must go towards one of two things: the purchase of your first home, up to the value of £450,000, or your retirement, from age 60 onwards. If you take money out before you turn 60 that's not for your first home, you'll be charged a penalty of 25% of the amount you withdraw.
If you start a LISA aged 18 and pay in £4,000 every year until you turn 50 (the maximum age you can still pay into a LISA), you’ll receive £32,000 in government bonuses — that’s free money.
If you’re buying a property with somebody else, if they qualify, they can also take out a LISA, doubling your combined money.
And if you have a fully funded ISA from previous years but don’t think you’ll be able to save £4,000 in the next tax year for a LISA, you can consider transferring £4,000 from another ISA into your LISA at the start of every tax year to maximise your 25% government bonus.
General investment accounts (GIA)
With no limits on annual contributions, a general investment account can be the way to go if you want to access your money before retirement age, and you’ve maxed out your ISA allowance for the year.
Like a stocks and shares ISA, a GIA is for the longer term because generally your money will be invested into the markets.
And as above, that means your investment can go down as well as up, so if you have no risk tolerance or feel extremely uncomfortable about the value of your capital decreasing at times along the way, you should seriously consider your risk before investing.
Unlike ISAs, this type of investment is liable to tax on any income and capital gains you make above any tax-free allowances.
For the vast majority of us, a pension is the best option when saving for your long-term future, and you should maximise your allowance before investing elsewhere if the money is for your retirement. They defer tax and the fund can sit outside of your estate for inheritance tax. And if you’re employed they’re easy to use because of auto-enrolment, with workplace pensions typically operating with low fees.
Pensions offer tax relief on contributions up to 100% of your pensionable income (annual salary/net profits) or a maximum of £40,000, whichever is lower (the £40,000 limit may reduce when pensionable income exceeds £200,000).
That means that instead of paying tax on your pension contributions, the money is rebated: if you pay in £100, the government will add the basic rate of tax, or £25, too. If you’re a higher or additional rate taxpayer, you’ll need to claim the extra tax relief on personal contributions from HMRC, either by a letter or your self-assessment.
And when you’re eligible, you can take 25% of your pension out as a tax-free lump sum, and do something like draw down the rest as income or buy an annuity. How much tax you'll need to pay on this will depend on your own circumstances — and may change over time.
The disadvantage is that your money is tied up until retirement age, which is currently 55, and will rise to 57 in 2028. But with recent research showing that over half of Brits in middle age are not sure when they’ll be able to retire, the second-best time to start planning ahead is today — the best time was yesterday.
If you’re investing for the future, you should consider the surge in ethical investing or ESG — backing companies based on their Environmental, Social and Governance (ESG) policies. More than just potential profitability, ESG funds look at potential impact on communities and environments.
If these factors are important to you, then seek out suitable ESG funds for your capital. The choice is wide and growing.
Tax information is correct at time of publication. Tax treatment depends on individual circumstances and is subject to change in future.