Reduce Your Financial RISK
By John Lister
johnlisterwriting.com
‘Risk-free investments’ is a bold claim, but you need to check the definition. Even when savings or investments have a fixed return, you do face a more fundamental risk: that the organisation promising to pay you winds up not doing so, for example if it goes bust. For this reason, investing or saving in a government programme is normally considered extremely low-risk, even more so when you’re dealing with the UK government.
The best known government programmes are operated by National Savings and Investment. These include ISA programmes where the returns are tax-free and saving programmes where the returns are treated as part of your taxable income.
Unfortunately, while you still have security from such programmes, the level of return recently moved from mediocre to miniscule. The Direct ISA product has dropped from paying 0.9% a year to 0.1% a year, while the Direct Saver dropped from 1% to 0.15%. Even the Junior ISA, which lets you save for a child (who can only withdraw the money once they turn eighteen), has dropped from 3.25% to 1.5%. For those who are willing to have a little less security, it may be worth looking at savings rates from banks, building societies and other institutions. Look for banks and building societies that are registered and regulated in the UK, as normally any savings up to £85,000 are guaranteed by the government.
For those looking for a little excitement without giving up security, Premium Bonds are still worth a look. You can put in anything between £25 and £50,000 with the guarantee of getting it back in full at any time. You don’t get any interest, but for each £1 of bonds you own, you have a one in 34,500 chance of winning a prize each month, the highest of which is £1 million. All prizes are tax-free.
Another effectively ‘risk-free’ option is gilts. These work a little like bonds issued by businesses to raise money but are instead issued by the government. The name is short for ‘gilt-edged security’ from the idea that the UK government repaying investors is as close to a sure thing as it gets.
You get a guaranteed payment every six months for the fixed lifespan of the gilt, then get your money back when it matures. You can also buy or sell the gilt on the open market and get any payments due while you hold it. The market price will vary over time, largely depending on how well other types of investments such as stocks are doing and thus how good the gilt looks in comparison.
With any guaranteed return investment, don’t forget inflation. If you make one per cent return in a year but prices have risen by two per cent, you’ve effectively lost money. Often this is unavoidable in a poor market for savers, but you need to take it into account when weighing up the balance of risk and reward across different investments.
“Look for banks and building societies that are registered and regulated in the UK”