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The extended period of low interest rates since the financial crisis in 2007/8 has made savers think hard about keeping their hard earned cash on deposit, particularly when the rate of return doesn’t keep pace with inflation, so for those who don’t want to spend their money and want to put something aside for the future what are the alternatives?
Investments can appear complex to some people, so here are some important points to consider before making any financial decisions:
Decide how long you can commit to invest your money for. If you can’t afford to tie your money up for a number of years then your choices can become very limited and the shorter the term the greater the effect of charges and advice fees will be. You should also be able to leave your money invested long enough to help overcome the possible ups and downs of investment markets.
Assess how much risk you are prepared to take with your money. The word risk can strike fear into some would be investors, but it is important to realise that all investment carries some element of risk. You may view depositing funds within a cash account as being risk free, but low interest rates and rising inflation will constantly erode the real spending power of your money.
An important part of selecting the right investment is carrying out an assessment of the level of risk you feel comfortable with. This allows the correct mix of investment types (growth and defensive) to be used to help manage your expectations of return and your tolerance of a fall in value.
Consider your tax position. A good adviser will always take this into account and investigate the best tax wrapper for your money. This could be an ISA, unit trust, OEIC, pension, investment bond, or other investment vehicle. Consideration should also be given to the use of trusts particularly when Inheritance Tax is a possible issue.
Costs inevitably have an effect on your investment returns, so those applicable to your investment should be clearly stated, with a transparent distinction between those payable to your adviser and those for the product, fund or investment platform. Remember that no investment is cost free, that cheap isn’t necessarily good and that high cost doesn’t guarantee better performance.
5. Seek independent financial advice.
The Retail Distribution Review (RDR), which came into effect at the end of 2012, set out new rules regarding the delivery of regulated financial advice. Unless you are an experienced investor with knowledge of financial markets and have confidence in making you own investment decisions, you should probably seek financial advice. You'll be able to talk through all the points raised above and ensure that your investments are tailored to your needs and investment objectives.
Derek Baty, Financial Planning Consultant
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