27/06/06
Get your investment priorities right!
Recent data from the Bank of England showed that the amount of personal debt owed by UK families is now almost £1,200 billion and, disturbingly, the level of bankruptcies rose by 73% in the first quarter of this year. Meanwhile, various surveys show that we are not saving enough towards retirement.
A lot has been written about the gap between the money invested in pension funds and the amount needed for everyone to have a reasonably comfortable retirement. This may seem like a major problem for the government, but it's even more of a problem for an individual with no pension arrangements. Addressing the problem may involve paying into other forms of investment plan other than pension schemes, with the tax treatments of the various options being a key factor in deciding which is best.
However, most people will also want to make a start on saving for the short and medium term and there are several ways of achieving that, each offering different levels of access and risk. So anyone in the fortunate position to have some spare cash faces something of a dilemma when it comes to prioritising how best to tackle the competing demands on their additional cash.
They may have acquired a lump sum from a bonus, an inheritance or possibly a maturing long term investment plan. Or perhaps they have started a new job, returned to work or had a pay rise and now have a bit left over at the end of the month. They don't want to fritter away their new found riches and the question currently exercising the mind is how to make the best use of this spare cash.
The starting point is reducing debts. The most expensive form of borrowing is likely to be a credit card or personal loan, followed by a mortgage, so this is the order in which you should pay them off, either completely or in part. Look out for early repayment penalties and make sure any introductory rates have come to an end. If your mortgage provider charges interest daily, you should see the benefits in your payments immediately. Otherwise, it may be worthwhile switching your mortgage to a lender who charges daily and allows overpayments.
If you still have cash left over, you have an opportunity to set aside some money in the form of savings. Firstly, you need to decide how long you want to invest for. It's never a good idea to lock all of your money away so, as the first step, set up a rainy day fund with enough to cover emergencies. Now look at the options for longer term savings. It's unlikely you'll have enough money to meet all your future needs so you now have to prioritise.
Factors you should consider include the period over which you are prepared to invest, the level of risk you are comfortable with, historical performance of various investments and how best to split your money to meet your current and future needs.
The investment decision typically starts with maximising your tax benefits. This points towards a more flexible short-term investment such as an ISA, which should be viewed as a five year minimum commitment, or a longer-term plan such as a pension.
The options for investing in a pension will depend on your current arrangements. If you are not a member of a company scheme, now may be the time to start saving for retirement. If your employer does offer a pension scheme but you won't have enough service to get a full pension, you should consider making additional payments into an AVC, either through the same scheme or independently.
The investment choices available to investors in each of these areas are similar and the final decision will hinge on the most appropriate wrapper and the investment mix. There has been substantial growth in the popularity of wraps, which allow all of an individual's wealth to be held in one convenient form.
To help with investment decisions, some of these companies will use portfolio planning, or x-ray tools as they are known, which help individuals to make appropriate investment decisions across the range of asset classes including cash, equities, bonds or property, depending on their attitude to risk.
Some IFAs and individuals do not possess the tools to do this or may not wish to have specifically tailored investment solutions. These people may choose to take a standard product. The difference between the two options is similar to a made-to-measure suit compared with one that is bought off the peg. For these people, a fund of funds arrangement is more appropriate.
The next step is to decide on an asset split and then to apportion the investment accordingly across a range of actively managed specialist funds. At the highest level, this means looking at equities, bonds and property. Then each category needs to be subdivided into regional markets such as UK or overseas for equities, corporate bonds versus gilts, and commercial or residential for property.
In reaching the final decision, many advisers or investment managers use stochastic investment programmes which look at a range of historical data and are generally fairly sophisticated. You should look for a provider with a robust and repeatable process as well as a good track record. You may wish to make your own investment decisions, seek advice from an IFA or broker, use a money manager, or go online. Whichever category you fall into, your investment portfolio should be structured to meet your current and future requirements, and your individual attitude to risk.
Making the initial investment decision is only the starting point. It is just as important to review the performance of the portfolio regularly, either on your own or with your adviser, and to make any adjustments to meet future changes in your situation. However, some fund of funds arrangements will continually review the best funds on the market on an ongoing basis, so removing the need to monitor your investment.
Phil Barker, Head of Retail Sales at Standard Life Investments
First published in Investment Week on 3 July 2006
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP. Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited.
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©2008 Standard Life Investments.
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