Accumulating sufficient wealth to take us into – and through – retirement usually requires a near lifetime of patient saving and investing.
It involves putting money in the building society, buying a home (maybe a buy-to-let too), paying into the works pension, managing a share portfolio and taking out a tax-friendly Isa.
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Often the journey is smooth but, on occasions, hiccups de-rail it – unexpected events such as redundancy and unnerving episodes such as sliding stock markets. Certainly, recent sharp falls in equity prices have unsettled many investors.
Anyone building long-term wealth must diversify their assets, combining risky – but potentially rewarding – investments with cash.
Here we highlight some of the foundations that should underpin any portfolio.
No wealth portfolio should be without cash. It should be there not just to meet financial emergencies or necessities – a new car or an unforeseen trip – but to provide a counter to risky assets. It is the ultimate ballast.
Forget that returns from cash are meagre and below the rate of inflation. Just cling on to the fact that £1,000 saved will mean at least £1,000 back at some stage in the future, with a steady drip of interest in the meantime.
Of course, you need to bat clever and ensure your savings are protected by the Financial Services Compensation Scheme. So do not save more than £85,000 with any one bank or building society.
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Investment platforms are increasingly looking to attract cash savers. For example, Hargreaves Lansdown now provides an ‘Active Savings’ service that allows clients to save in a range of fixed-term savings accounts. It means investors can also be savers under one online roof, enabling them easily to keep an eye on a big chunk of their wealth portfolio.
Active Savings is not without flaws. It currently only provides access to nine providers – ranging from the familiar, such as Coventry Building Society, to the less well known, such as Close Brothers and Vanquis.
This means none of the top rates in our best buy table on page 107 are embraced by the service. Also, money cannot be held under the tax-free wing of a Self-Invested Personal Pension (Sipp) or an Isa, though Hargreaves Lansdown says this will be possible sooner rather than later.
Other cash management services are offered by Flagstone, Octopus and Raisin. All differ in terms of the breadth of accounts available, how they operate and fees – some charge savers, while others take fees from the providers. Reviews of all four platforms are available at savingschampion.co.uk.
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Anna Bowes, director of Savings Champion, says: ‘The rise of cash management platforms is welcome. It means savers are being guided to better savings deals. Hopefully, more choice will be available as the platforms grow in popularity.’
Savings Champion, a rate scrutineer, itself provides both a ‘cash advice’ and ‘concierge service’ that help savers maximise returns. Both services are fee charging.
Like cash, no wealth portfolio should be without a sprinkling of products from National Savings & Investments.
Effectively the Government’s savings arm, no other provider offers greater financial security.
The choice of products is more limited than it used to be, but popular portfolio boltholes include Premium Bonds (with a maximum holding of £50,000), which offer monthly tax-free prizes ranging from £25 to £1 million.
Income bonds remain a favourite, paying a monthly income equivalent to 1.15 per cent a year (with a maximum holding of £1 million), as does the Direct Saver account, a no-notice account paying 1 per cent (with a £2 million savings limit).
Patrick Connolly is a chartered financial planner with Chase de Vere. He says National Savings & Investments is an integral part of many clients’ portfolios, adding: ‘With NS&I, savers get a name and brand they can trust that is backed by the Government. They can also benefit from competitive rates of interest on some of its products’.
Gold is considered by many to be a safe haven in stormy times. In recent months, as stock markets have undergone a correction and economic tensions have risen, the gold price has rallied.
From a 2018 low in August of $1,180.40 per troy ounce, the gold price has risen to just below $1,300.
A recent survey of precious metal investors by online bullion dealer Bullion Vault indicated that nearly one in four believe gold prices could rise by as much as 20 per cent this year – with the consensus being for an increase of 10 per cent. For investors, there are various ways to get exposure to gold.
The cheapest approach is to buy an investment that tracks the gold price. These are called exchange traded funds, or ETFs, and are provided by the likes of iShares (part of asset manager BlackRock) and Invesco. They can be bought through a stockbroker and most fund platforms.
Purchases will incur a dealing charge and there will be an ongoing annual fee on the fund. For example, iShares Physical Gold charges 0.25 per cent.
An alternative approach is to buy a fund with exposure to gold, such as Personal Assets, Rathbone Strategic Growth or Ruffer. More targeted funds include BlackRock Gold & General and Ruffer Gold.
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With the exception of Personal Assets, these funds invest in the shares of gold mining companies rather than physical gold.
Finally, physical gold (bars and coins) can be bought from an online bullion dealer – the likes of Goldcore and Bullion Vault – or the Royal Mint. Buyers can have it stored – for a charge – or delivered, though investors taking the second option will need to have somewhere safe to keep it.
The Royal Mint has just launched its 2019 sovereign and half sovereign gold bullion coins, priced at £259 and £136 respectively.
Do not be put off by the unfriendly label. These plans provide returns linked to the stock market, but with built-in protection so they can generate profits if equity prices fall or go sideways.
They are best explained by way of an example. Mariana Capital has just launched 10:10, a plan with a maximum life of ten years, but which can end earlier, according to how the FTSE 100 index of the London Stock Exchange’s hundred top shares performs.
Three options are available, but all require an investor to sit on their hands for two years. Then when the stock market closes on February 22, 2021, its level will determine whether the plan continues or ends (known as ‘kick out’).
Under option one, which is the least risky option, if on February 22, 2021, the Footsie is more than 2.5 per cent higher than it was on February 22 this year (when the plan starts), the scheme comes to an abrupt end.
The investor receives an annual return of 9.44 per cent for the two years they have tied up their cash.
So on an investment of £10,000, they receive £1,888 plus their £10,000 back. The profit is treated as a capital gain in the tax year it is received. Under options two and three, the plans ‘kick out’ on the same date if the Footsie is at the same level or higher, in the case of option two.
In the case of option three it kicks out if the Footsie is more than 5 per cent higher. In these cases, investors get £2,456 and £2,902 respectively, plus their £10,000 back. These equate to an annual return of 12.28 per cent and 14.51 per cent a year respectively,
If the index levels have not been reached (and so there is no kick out), the plans continue for another year. Then under options two and three, the same test is applied again, resulting either in the plan continuing or ending, resulting in a payment of £3,684 (for option two) or £4,353 (for option three).
Option one is more complex, as the hurdle for kickout falls every year, meaning investors are more likely to get their cash back sooner.
For example, on February 22, 2022, if the Footsie is at the same level or higher than it was on February 22, 2019, the plan ends, resulting in a profit of £2,832.
And on February 22, 2023, it only needs to reach 97.5 per cent of its original value. But there is a sting in the tail. If at the end of ten years, the Footsie is more than 30 per cent down, an investor loses a chunk of their original investment equivalent to the market’s fall.
So if the index has fallen 35 per cent, an investor will get back just £6,500 of their original £10,000. Any fall in the index of less than 30 per cent results in an investor getting back £10,000, but of course they have lost the interest they would have earned if the cash was in a savings account.
Ian Lowes, managing director of Lowes Financial Management, monitors structured plans. He believes the products are ‘heaps better’ than they were. He says: ‘They provide defined outcomes for investors on defined dates and under defined circumstances.’
Stephen Womack, a chartered financial planner with David Williams IFA, uses them for clients. He says: ‘They can provide positive returns even when stock markets are flat or falling. I also like the kick-out feature which forces an investor to take profits. One mistake many investors make is holding on to investments for too long.’
Yet they are not without risk. They cannot be easily jettisoned, so investors must be prepared to have money tied up for a while. Investors can also lose money. In addition, not all plans are covered by the Financial Services Compensation Scheme. But it is the plans that are not covered by the FSCS such as 10:10 that are most lucrative.
Here, the key is the financial stability of the investment bank behind the plan, which is responsible for honouring the plan’s promises. It is referred to as the counterparty.
If it gets into trouble or goes bust, investors could suffer big losses, as some did when Lehman Brothers – a counterparty to plans set up in the mid-2000s – hit the buffers in 2008.
In the case of 10:10 (written under Cayman Island law), the counterparty is Goldman Sachs. Others include Citigroup, Credit Suisse and HSBC. Though many structured plans can be bought online, Womack recommends taking advice, as the products are complex. He adds: ‘They might account for 15 per cent of a new portfolio that we recommend today.’