6 January 2021
With interest rates still sitting at an all-time low of just 0.1% as we go into 2021, and with the Bank of England giving no indication of them rising any time soon, people are understandably unsure about the best place to invest their money and savings this year.
Forecasters expect the base rate to stay at just 0.1% for another three or four years and it has even been touted that we may see the introduction of negative interest rates for the first time in history – although it is highly unlikely savings rates on ordinary instant access accounts will actually dip below zero.
The idea of negative interest rates is to discourage saving and encourage lending and spending to help boost the economy in response to the forecasted Covid-19 related recession. So whilst this is good news for those looking to borrow and those with mortgages, it leaves savers in a precarious situation. And choices need to be made, because when money is left over a long period of time to stagnate in a flat or very low interest environment, inflation will actually erode away its true value quite significantly.*
“To say 2020 was an ominous year financially is an understatement, says Wayne Berry, from wealth management firm Brewin Dolphin. “But letting your savings languish is financial suicide and tantamount to stuffing the cash under your mattress and forgetting about it. There are better options!
So, what are the options in this low or negative interest rate environment?
“The very first thing to do if you find yourself fortunate enough to have spare cash is to pay off debts first and foremost,” says Berry.
Then, in order of priority, Berry recommends:
1. Pay into your pension pot. Pensions are very attractive at the moment. Currently you get tax relief on whatever you contribute to it at your marginal rate. For example, a 40% tax-payer will get 40% tax relief. So, in effect, a contribution of £10,000 costs you £6,000 out of your taxable income.
As Berry explains, “You might not think about planning for 20, or 30 years ahead but as the Chinese proverb goes: ‘The best time to plant a tree was 20 years ago. The next best time is today.’ So get it invested! If nothing else – just for the tax relief. If you did this every year, and see some return on your investment every year, the compounding effect is massive.”
Private pensions can also be passed on to your beneficiaries if the worst was to happen to you – free of inheritance tax at the point of transfer – so that is also a big plus for a pension saving.
2. Invest in a Stocks and Shares ISA. With an annual allowance of up to £20,000, whether you self-select or get into a model portfolio, your returns will be tax free. It is unlikely your portfolio will permanently lose capital in the long run, unless you’ve been concentrating portfolios into few assets and taking big risks.
“Of course stocks and shares ISAs are liable to fluctuations – this year being a prime example – holding one this year was volatile, but had you held your nerve through it all, you’d actually be showing quite a healthy profit on the year, despite them being down 25% – 30% back in March dependent on the risk you’d taken.” says Berry.
Once you have paid into your pension pot and maxed out your ISAs for the financial year you could then think about:
3. Invest in a General Investment Account (GIA). This is a simple way of investing more money once you have reached your annual ISA allowance. So if you are in a position where you have already invested the maximum £20,000 annual allowance in an ISA and still have money to spare, a GIA is a good option to go down. Then you would move money across from this GIA to an ISA each tax year. By doing so, you have the ability to crystallise capital gains each year up to the value of £12,600 – free of any tax.
4. Overpay on your mortgage. Depending on the interest rate your mortgage is charging you, taking a chunk off it is a good strategy.
But, as Berry stresses, “Always, always pay off any debt you might have first before considering this option. Depending on the rate of interest on your mortgage, I would recommend this option after you have already paid into your pension and ISA.”
And if you’ve maxed out the above, but you’re still a higher rate income tax-payer you can think about Enterprise Investment Schemes or Venture Capital Trusts which give you tax breaks when you invest in relation to your income. But they are very high risk and it should be one of the last things to be considered as you could lose your investment.
–ENDS-
*An impact of inflation calculation shows that if you started with £10,000 today – with inflation around 2% a year for the next 10 years, that £10,000 will be worth the equivalent of £8,200.
PRESS INFORMATION For further information, please contact:
Richard Janes richard.janes@brewin.co.uk / Tel. +44 (0) 20 3201 3343
Anita Turland: anita.turland@brewin.co.uk / Tel: (0) 20 3201 4263
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
Camarco: brewin@camarco.co.uk / Tel: +44 (0)20 3757 4980
NOTES TO EDITORS
Disclaimers:
- The value of investments can fall and you may get back less than you invested
- The value of investments and any income from them can fall and you may get back less than you invested
- The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.
- Past performance is not a guide to future performance
- This information is for illustrative purposes only and is not intended as investment advice.
- No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
- Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
About Brewin Dolphin
Brewin Dolphin is a UK FTSE 250 provider of discretionary wealth management. With £47.6bn billion in total funds, it offers award-winning personalised wealth management services that meet the varied needs of our clients including individuals, charities and corporates.
We give clients security and wellbeing by helping them to protect and grow their wealth, in order to enrich their lives by achieving their goals and aspirations. Our services range from bespoke, discretionary investment management to retirement planning and tax-efficient investing. Our focus on discretionary investment management has led to significant growth in client funds and we now manage £41.2* billion on a discretionary basis.
Our intermediary business manages £14.5* billion of assets for over 1,700 advice firms either on a discretionary basis or via our Managed Portfolio Service.
In line with the premium we place on personal relationships, we’ve built a network of 33 offices across the UK, Jersey and Dublin, staffed by qualified investment managers and financial planners. We are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
*as at 30th September 2020