Investing your money for financial freedom
To achieve sufficient wealth for ‘independence’, one alternative is to save simply just using deposits and quasi-deposits. In the third of a mini-series, award-winning financial planner Rob Noble Warren looks at this option.
Many investors want a simple life, and prefer to avoid the effort that investing in world markets requires. Deposits might fit the bill, were it not that the top savings bond currently delivers only 3% (before tax), and ‘easy access’ current accounts provide 1.5%. But there are options which are not commonly marketed, which deliver between 3% and
6% p.a. These can be tax free.
Since the credit crisis of 2008, people now appreciate that although the safety net for bank customers held then, the costs of doing it again are significant. The continuing problems highlighted in the UK 2014 Autumn statement means that Britain cannot easily afford another systemic banking crisis until past 2025. To avoid this, banks’ reserve capital will increase up to ten times, and that implies that bank profitability will be low, and therefore they will be slow to pass on interest rate rises to savers.
One alternative for individuals is to invest in Government Gilts, with the advantage that security is higher than a bank, and there is no need to overcome the paperwork hurdle on every move from one matured account to the next. Opening an acount with a stockbroker is simple. Investing then in four or five of the Gilts listed on the London Stock Exchange will result (at the time of writing) in a return of 3 to 4%.
Unlike a bank deposit, the current market value of the stock will change, but if held to maturity, a maturity at price 100 is guaranteed. For index-linked stock, the maturity price is not 100, but s recomputed in line with inflation. Investors can ask their asset manager for a selection of stock with maturity dates that fit their own cash requirements, take gross interest, and complete their tax return with just one tax certificate at the year end. For those who place stock inside their ISA or self invested pension, there is no income nor gains tax to pay under current rules.
A second and new alternative is to invest in a peer to peer lending pool, where one is lending to UK based individuals who have adequate security – perhaps even businesses. In fact some businesses have reported that ‘they’ll never use the services of a bank again’.
Although the security ratings conferred by Standard & Poors have been as high as ‘A’, there is as yet no evidence of how the default rate of these pools (currently 1%) will react when interest rates become higher, or upon a sustained collapse in the world economy. History suggests that the default rate will rise to 4% (compare that to the 8% default rate of sub-prime mortgages in 2006/07).
However, given that the current return is 6%, potential savers may well decide that this is a better option than bank accounts and less susceptible than share-based funds to layers of charges. One of the peer to peer websites, Ratesetter, comments that self invested pensions can now invest with then, although administrators still get confused when approached to permit such an investment. In 2015 the UK government plans to allow ISAs to be able invest in peer-to-peer pools.
Rob Noble-Warren, an author, award-winning planner and chartered tax adviser, is writing in YourMoney.com for high net worth investors who like making their own decisions, and find that investing directly gives them more choice, less charges and more customisation.