Low (or no) Risk Investing Strategies

Investment utopia has to be investing your money for no risk and high returns. This is a subject dear to many clients hearts, especially as uncertainty and recent falls in the stockmarket can make many people feel
uneasy, and look for safe havens.

If you're determined to play it safe and avoid the stockmarket, what are your options?

National Savings

The main advantages are that your money is 100% safe as it is backed by the UK Government, and there are several routes that are tax free.

Cash ISAs, also available from most banks and building societies. Rate – 5.05% variable. Limit £3,000 per person per tax year.

Premium Bonds, Do you feel lucky? You have a one in 24,000 chance to win a prize each month, up to £1 million. Your capital is secure, but your return depends on your luck in winning. Rate equivalent – 2.95%. Limit £30,000 in total.

Fixed Interest Savings Certificates, over 2 or 5 years guaranteed return. Rate – 3.2%. Limit £15,000 per issue. Rate on index linked version – inflation plus 1.05%.

The remainder are taxable and are shown as a return for a basic rate tax payer (brt) and higher (hrt). Note that interest is often paid gross.

Fixed Rate Savings Bonds, over 1, 3 or 5 years with tiered interest rates. Rate typical on £50,000 – brt 3.56% and hrt 2.67%. Limit £1m.

Pensioners Bonds, over 1, 3 or 5 years. Rate typical – brt 3.48% and hrt 2.61%.

Income Bonds, tiered interest rates. Rate typical – brt 3.2% and hrt 2.4%. Limit £1m.

Please note on any fixed interest product, you run the risk of the rate becoming uncompetitive if interest rates rise.

Building Societies and Banks

There is in excess of £200 billion invested in instant access accounts alone in the UK.
                
This is often where people start to look for a safe way to save. It is interesting to note that in most cases the rates below exceed those of National Savings.

These organisations are adept at tempting you to saving your money with them by using tie ins or introductory offers. This does not mean you should not use them, however beware!

Best Intro Rate – brt 4% and hrt 3%.

Best Fixed Rate – brt 4.4% and hrt 3.3%.

Best 90 Day Notice – brt 4.04% and hrt 3.03%.

Best Instant Access Internet – brt 3.8% and hrt 2.85%.

Best Phone Instant Access – brt 3.6% and hrt 2.7%.

Best Mini Cash Isa 30 Day Notice – 5.3% tax free (£3,000 per annum per person).

It is worth mentioning that your capital is not all guaranteed, except for the first £2,000. The next £33,000 has a 90% rate of protection, thereafter none. This is per investor. It should be pointed out that the risks here are very low if you invest in the major banks and building societies.

Also, you must check that the product you choose remains competitive on an ongoing basis.

So, what else could you invest in?

Short Term Government Gilts

These are essentially bonds issued by the government, and although not guaranteed, are fairly safe. They are sensitive to interest rates both during the term and when you sell.

The current rate for a 2 year gilt is 4.7% gross and they are taxable. So the rate for a brt is 3.76% and hrt 2.83%.

Guaranteed Investment Bonds

These are sold by insurance companies, and have growth or income variants.

For example, you can attain income of 4.2% for a brt and 3.15% for a hrt. (A 4 year product with £5,000 or more to invest.)

Summary

As we talk about these types of investment a lot, it is worth revisiting the importance of inflation risk.

Just to stand still, if inflation were 2.5%, an investor needs to attain brt 3.15% and hrt 4.15% gross. And if inflation were only 2%, £1000 today would be £666 in 20 years.

They are sobering statistics, and the longer the timescale the bigger the risk.

The Key Considerations

When reviewing the above rates, we are always looking to keep things simple. Therefore it will be the instant access accounts and cash isas we would recommend. And remember, if you or your spouse have no or little taxable income, you can receive the rates free or mostly free of tax by utilising your personal allowance and completing form IR85.

NOTE: Past performance is not a guide to future performance. The value of your investments may fall as well as rise.