You’ve worked hard and you’ve saved some money, and now you’re looking for the best way to make that money work hard for you. Unfortunately it’s not a saver’s market right now.
Interest rates are at a record low of 0.25% and there’s little sign of them rising anytime soon. This means you’ve got to hunt high and low to find a good deal, yet the savviest savers aren’t just looking for the best deals – they understand the real secret to saving success.
So, what is it?
The secret savings and investments ingredient is time. Long-term savings options – often with your cash locked away without options for withdrawing it in the short-term – yield the very best returns.
All this talk of time leads us to an important life question: do you think about the future? When it comes to your personal finances, it certainly helps to have one eye on the next few years, and ideally the next few decades. This goes way beyond ‘saving for a rainy day’ – the biggest financial question of all is one you may have only just begun to ask yourself: what are you going to do when you retire?
Save now, and save a lot
Let’s put this in perspective: if you’re 30 years old in 2016, the age at which you can start drawing a state pension is likely to be 68 (at least). Then let’s say you’ve paid off your mortgage and have average outgoings when you retire. How much would you need to keep you going?
Ageing populations and spiralling pension costs are, according to some, a sign that we’re hurtling towards a future pensions crises where the retired of the future will be living on the state pensions – which is, by most standards, not a lot at all.
A quick illustration
Then let’s give you £15,000 a year for the rest of your life from the year you retire. With the UK average life expectancy at 81 years of age, that gives you 13 years of £15,000 per annum. Here’s the shocking part: to deliver this you’ll need £195,000 – or the equivalent of saving £427 a month every month for 38 years from the age of 30 onwards.
Now this is a simple calculation to illustrate a point – it doesn’t factor in compound interest or the state pension, and it also ignores employer pension contributions, but as they could be as little as 1%, it’s unlikely to make a significant difference. No wonder then that we’re seeing headlines like ‘Want a £20,000 pension? Then you’ll have to save a quarter of your salary’.
The bottom line is this: saving for a comfortable pension is tough, really tough. Yet pensions are unquestionably the best way to save money. They are the most tax-efficient, risk-averse method of saving. The compromise is access: you can’t get to your money once it’s in a pension. But your future retired self will be thankful in years to come.
What other savings options are available?
Let’s put pensions aside for a moment and take a look at the savings alternatives available in today’s market:
- Cash savings
The standard savings accounts offered by banks and building societies. They are low-risk, but also low-reward investments – with rates at a historic low, there’s a good chance any returns will be wiped out by inflation, leaving you back at square one.
There are plenty of savings options to choose from: ISAs (which come in various flavours, including cash ISAs, stocks and shares ISAs, and lifetime ISAs), instant access savings accounts (no limits on when you can withdraw money), notice savings accounts (you can take out money provided you give notice) and standard savings accounts (which usually carry the lowest interest rates).
But be careful, you may need to pay tax on any gains you make, unless you’re using an ISA.
- Government and corporate bonds
This type of investment is based on debt. You, in effect, lend governments or businesses money. In return they give you regular interest payments.
The risk level varies – credit ratings from agencies like Moody’s, S&P and Fitch Ratings will give you an indication of how much.
- Stocks, shares and property
You invest in a share of a company, and, hopefully, as the company grows so does the value of your. Risk levels vary wildly, and selecting a winner can sometimes feel like trying to win the lottery: almost impossible.
Property investments usually take the form of commercial investments, which can be volatile but also offer quick gains (if you’re lucky).
This is why you need lifetime financial planning
Working out the best way to save money over a long period time (or any period of time) is tricky: there are not only lots of different products to compare, there are a host of labyrinthine rules, regulations and shortcuts that can be used to boost your savings returns and keep tax to a minimum.
Why not contact Flying Colours and find out how to make your money work harder? Our experienced savings and investments experts know all the secrets to getting maximum returns in this challenging financial climate. Drop us a line – you never know where it might take you.