Putting money away on a regular basis is not only a good financial discipline but ensures shares are bought at a fair overall price and cash secures some of the best interest rates available.
Providers like a steady and almost predictable stream of money and reward regular savers. Yet many of the schemes available seem little known.
Investors often worry on both timing – when to make a stock market investment and not hit the high point – and how to spread risk. The solution is to use a fund and pay in regularly.
If there are significant market falls, savers simply purchase their investments cheaper the following month, thus reducing the overall average buying cost.
There are two basic schemes: closed-ended (notably investment trusts) and open-ended (such as unit trusts). The former have an independent board of directors who act in the shareholder interest, can borrow (‘gear’) to gain an advantage and have a fixed number of issued shares.
The latter can allocate as many units as it likes and is prohibited from borrowing. Its charges are usually far higher.
Stockbrokers will usually only give advice on closed-ended and financial advisers on the latter, unless they are fee-paid rather than remunerated by commission.
Investors are currently very nervous of taking risk and are opting for perceived safer areas like corporate bonds. However, Elizabeth Hastings, of AWDChase de Vere, warns that “by trying to avoid risk, they are missing out on potentially good opportunities in the stock market, where many shares are cheap, because they are worried about investing at the wrong time and losing their money. By making regular investments, these risks can be largely avoided.”
Regular savings plans are available with both schemes. It’s possible to buy shares in an investment trust with a professional fund manager from as little as £10 a month (Caledonia Investments through The Share Centre).
Martin Payne, Leeds director at stockbrokers Brewin Dolphin, likes Temple Bar Investment Trust as “a core good quality holding with unbroken increases in income distribution for 28 years”. It is a UK focused income and growth trust with an annual yield over four per cent and accepts monthly contributions from £50.
Payne also tips Monks Investment Trust for global growth (with an 11 per cent discount to net asset value) and Templeton Emerging Markets (on five per cent discount), accepting £30 monthly and either £50 monthly or £150 quarterly respectively.
If the dividend is not required, let it accumulate and purchase more shares/units with the proceeds. Albert Einstein said, “The most powerful force in the universe is compound interest.”
A ‘fund of funds’ on a regular basis is the route chosen by Bob Teasdale, a Sheffield business manager. He wanted low risk after “having my fingers burnt in the dotcom era” and has chosen Nationwide Equity.
He invests £500 monthly across five funds out of a choice of 20: Jupiter Merlin Growth, M&G Recovery, M&G Property Portfolio, M&G Strategic Corporate Bond and Newton Balanced. If £100 had been invested in each fund over five years, it would be worth £34,353 for £30,000 outlay.
For a stock market Junior ISA, Alliance Trust accepts £50 monthly for any investment trust with no initial fee and only £25 annual charge.
Friendly societies have two regular schemes, other than the ISA route. One is the Tax-exempt Savings Plan (TESP) which allows up to £25 monthly to be saved. The other is the Regular Saver where each society sets its limits.
The money is invested in a with-profits fund which rolls up free of tax (apart from Gordon Brown’s 10 per cent withholding tax on dividends). The investor does not have to pay either income tax (unless a higher rate taxpayer on the Regular Saver) or capital gains tax.
Over 15 years, annual growth rates of 11.6 per cent for Sheffield Mutual and 9.1 per cent with Wakefield-based Kingston Unity have been achieved with £50 invested monthly in with-profits endowment savings plans, paying £23,043 and £18,603 respectively.
With no age restriction, a TESP is an ideal plan for a baby. Choose the contract length, such as 10 years or for a baby more like 18 or 21 years. A guaranteed sum assured will be made but is likely to be exceeded.
Sheffield Mutual, for instance, achieved 12.01 per cent annual return on its 10 year plans maturing at the end of December, paying £5,552 for £3,000 outlay (£25 per month). With life cover, the rate was 7.99 per cent, paying £4,500. The sums assured were £3,829 and £3,061.
For those taking a cash route, the best regular rate is with First Direct, the HSBC subsidiary based in Leeds, which was founded in 1989. It pays eight per cent gross on £25-£300 monthly contributions which need to be paid from a First Direct current account. No withdrawals are allowed.
The rate is fixed for 12 months, which means £156 gross (£124 net) interest could be earned if making the maximum monthly payment.
HSBC itself has an eight per cent fixed, also on £25-£250 monthly savings, which is available to Advance, Graduate, Passport or Premier accounts.
With bank and building society plans, watch that the £85,000 limit for compensation is not exceeded. Yorkshire Building Society, for instance, owns Barnsley, Chelsea, Egg and Norwich & Peterborough whilst Nationwide includes Cheshire, Derbyshire and Dunfermline.
Often higher rates are only accessible in branch, such as Nottingham’s Diamond Jubilee fixed six per cent plan.
Watch for three catches:
n if rates are fixed or variable;
n if a bonus is included, noting when it expires, and if its payment depends on particular activity, such as a minimum number of credits;
n if any withdrawals are allowed and/or monthly payments can be missed.
One way often overlooked by those investing in a cash Individual Savings Account (ISA) is to drip-feed the money and thereby gain a better rate. Up to £5,640 can be sheltered in this tax year but you are not allowed to contribute to a cash ISA with more than one provider in the same year.
Children can also benefit from regular savings. A stunning fixed six per cent can be obtained from Halifax. The Kid’s Regular Saver accepts £10-£100 monthly for a baby up to a 15-year-old.