Savers must get the balance right

It all depends on how much cash you have to put away and whether it will be needed over the next couple of years, according to financial adviser Andy Gadd, head of research at Lighthouse Group.

“It is important to differentiate between assets such as equities and cash savings,” he explains. “For example, everyone should have between three and six months’ salary set aside in an easy access cash account before they consider other investments.”

However, having too much in cash means there is a risk of your money’s value being eroded by inflation, while a large percentage in stocks and shares may cause plenty of sleepless nights over the coming months. The trick is striking the right balance.

Savings accounts

The priority for anyone reviewing their investments is their savings accounts, which are usually held with a high street bank or building society. This money is often relatively short-term in nature so needs to benefit from the best available interest.

Last week’s decision by the Bank of England’s Monetary Policy Committee to cut the base rate to an all-time low of

1.5 per cent will see rates on savings accounts fall again, warns Michelle Slade, an analyst at Moneyfacts.co.uk.

“With so many accounts paying such low amounts, savers need to make sure they review the rate they are getting,” she says. “The impact of high inflation and tax means that basic-rate taxpayers need to earn a rate of 5.13 per cent to break even.”

Among the best easy-access vehicles currently available is ING’s Direct Savings Account, which pays 4 per cent year, according to price-comparison website Moneysupermarket.com. This rate falls to 2 per cent after a year.

Others worth a look include ICICI Bank, which pays 4.65 per cent on its HiSave one-year account, although this will tie up your cash for a full 12 months.

As you can see, before taking out a top-paying account, you will need to check the terms and conditions governing access to your money, the limits on how much can be invested and any other charges which may be applicable.

In addition, you need to consider whether being able to pop into a high street branch is important to you, or whether you’re equally happy to sort out your financial transactions over the phone or via the internet.

Individual savings accounts

In order to guarantee your money is working hard you need to ensure it is invested tax efficiently, points out Andy Gadd at Lighthouse Group. Having the right account means that you will be able to hang on to a greater percentage of your cash.

“The most obvious savings wrapper is the individual savings account (Isa) but other measures can be taken, such as married couples or civil partners putting savings in the name of the person paying the lowest rate of tax,” he explains.

Isas, which were first introduced by the Government back in April 1999, can be split into two camps — cash Isas and stocks and shares Isas.

Cash Isas, which are the most popular, are basically tax-free savings accounts offered by most banks and building societies. Interest is paid on a regular basis, and your investment is guaranteed not to lose any money.

Stocks and shares Isas invest in assets such as open-ended investment companies, investment trusts, gilts and shares. As they are exposed to stock markets, however, the value of your investment can fall as well as rise.

Since April 6 2008, people have been allowed to save up to £7,200 each year in Isas – a £200 increase on the previous limit – as well as having the freedom to transfer assets from cash Isas into stocks and shares Isas.

Half of this limited annual amount can be saved in a cash Isa with one provider, while the rest may be invested in stocks and shares Isas, either with the same provider or a different company.

Other investments

It obviously makes sense to switch savings accounts if you find one offering a better rate of interest, but be very careful before losing faith and cashing in shares and unit trusts, warns Geoff Penrice at Bates Investment Services.

“The worst thing you can do is sell something after the value has fallen substantially,” he says. “Investments go in cycles and there is a natural inclination to invest when prices and confidence are high, and sell when they’re low, which is why many small investors end up losing money.”

As far as individual companies are concerned, Gavin Oldham, chief executive officer of the Share Centre, advises people to think very carefully about where they invest. “You need quality stocks in your portfolio whose yields are good and whose dividends won’t be cut,” he suggests.

Of course, that’s easier said than done, so unless you are an experienced stock picker then it’s probably worth investing through a fund whose manager is responsible for researching companies.

However, funds certainly haven’t been immune to the widespread financial problems. Although your risk is much more evenly spread by investing in such portfolios, the fact remains that the vast majority of funds have fallen dramatically in value in recent times.

In fact, the average fund in the Investment Management Association’s UK All Companies sector is down by

33.9 per cent over the past year, according to figures up to December 15 2008, by fund manager Morningstar. The IMA’s Europe Excluding UK category saw a 30 per cent drop.

Even the performance of funds covering the same area can differ enormously. For example, the Neptune Japan Opportunities Fund has made 80.2 per cent over the past year, while Investec Japan has lost 26.1 per cent.

Darius McDermott, managing director of Chelsea Financial Services, says that the markets have been in a state of “utter carnage” over the past year but he also warns against acting in haste.

“People have lost money on paper but you will only crystallise that loss if you sell your investments when they are down,” he says. “If you’re investing in equities for the long-term, while you should review your fund choices and potentially switch them, you shouldn’t necessarily be exiting the market unless you need the cash.”

However, it’s certainly worth reviewing your decisions. Decide on how much risk you are prepared to undertake and what you want from your investment in terms of income and growth, and then seek professional advice.

So which funds do the advisers like? Andy Merricks at Skerritt Consultants favours corporate bonds. “A combination of overdone selling throughout the last quarter and overly pessimistic default predictions produce a tempting concoction of potential capital gain and high yield for those brave enough to dip in now,” he suggests.

Pensions

Tom McPhail, head of pensions at Hargreaves Lansdown, recommends that people re-examine the ways in which they’re planning to fund their retirement, as well as potentially increasing the level of monthly contributions.

Moving house, having a baby and changing jobs can all affect how much you will need in later life, he points out, so a complete review of your retirement planning should be undertaken at least once a year.

“It might be a case of moving between funds in your existing pension plan — or simply increasing how much you contribute,” he says. “If you think the plan is rubbish you have to enter the realm of transferring the accumulated funds to a new provider.”

As well as deciding which type of pension will suit your needs, such as a Stakeholder or the more flexible Self-Invested Personal Pension (Sipp), you should also check whether you will incur any penalty for moving your funds.