Why Investing Can Be Preferential to Saving With a Bank
Saving and investing are both extremely important but completely different. Whilst both can help you secure a more prosperous financial future, it is very important to understand when to consider saving and when to consider investing.
Arguably, the most fundamental difference between saving and investing is the ‘risk versus reward’ concept. Saving allows you to deposit your money with only the risk of the deposit taking institution failing, however your returns will be limited to the interest rates on offer. Investing provides the potential of a much higher return, but you take on the risk of capital loss.
A common concern most people have when investing their hard-earned money is losing it. In Gibraltar, HM Government of Gibraltar Debentures have been a popular choice for investors for some time and it’s hard to argue against this. An investment held with a government institution that offers a very competitive, guaranteed rate of interest and return of capital (conditional on the security of Government provisions of the Gibraltar Savings Bank Act) is very appealing.
However, investors should also be aware Governments are not immune to solvency issues and defaulting on payments of capital and interest to investors. You need look no further than what happened to Greece, Cyprus and more recently, Venezuela.
There is also an often, unnoticed consequence of investing all one’s savings in Debentures or indeed any investment that pays a fixed rate of interest. That is the effects of inflation. Gibraltar’s rate of inflation has averaged 2.7% for the last 10 years. Therefore, the real return on your investment (considering the interest rates payable on the current 5-year Debentures in issue) is 0.3% (3% - 2.7%) or 2.3% (5% - 2.7%) for pensioners.
A SIPP is a type of pension that enables you (and/or your financial adviser) to choose investments from an almost unlimited range. These differ from traditional personal pensions offered by insurance companies whereby the investment opportunities may be restricted to a much narrower range.
Tax Relief for U.K. Residents
SIPPs work in much the same way as other U.K. personal pension schemes. You pay money in as and when you like. Relevant UK individuals enjoy tax relief at the basic rate of 20%. If you pay a higher rate of tax, you’ll usually be able to claim back even more through your tax return. You need to be under age 75 to receive tax relief. You should also ensure that you don’t contribute any more than 100% of your earnings (subject to the annual allowance – currently £40,000) after tax relief has been received or £3,600, if this is greater. Inside a SIPP, your money grows free from UK capital gains and income tax with the exception of some un-reclaimable withholding tax on dividends.
As you will be aware, the statutory sick pay in Gibraltar is only 2 weeks full pay and 4 weeks half pay in any 12 month period. Group Income Protection insurance is a valuable benefit which provides financial protection in the form of a replacement monthly income for your employees (and their families) if they are unable to work for a protracted period. There are tangible and intangible benefits for the employer as well.
Firstly, the amount paid in premiums to the scheme is a deductible expense and will therefore reduce the company’s corporation tax bill. Not only is it a relatively low cost benefit, but a wide variety of features can be added and it can be tailored to the employer’s requirements. It also allows the company to demonstrate its commitment and care to its employees and their families. This is something that, in turn, may increase employee morale and loyalty from existing employees and makes a business more attractive to new employees.
Protect and care for your staff with a Group Income Protection policy.
Telephone – 20042967
Have you reviewed your employment contract recently?
Imagine a situation where something were to happen to you (or any of the earners in your family for that matter) which resulted in you, or them, not being able to return to work for an extended period of time. Unfortunately, this scenario is not all that uncommon nowadays.
Legally, the Gibraltar Government or any private company you work for only has to pay you two weeks full pay and four weeks half pay in any twelve month period. The question you have to ask yourself is, do you think that the statutory minimum is enough to cover your monthly expenses and maintain a good quality of life?
With the imminent closure of the Leeds Building Society in Gibraltar, it may be that you will have to transfer your money elsewhere, but where? The answer to this depends entirely on how much of a return you would like to receive on your current savings. You could transfer it to another bank, however, considering the current low interest rate environment, inflation could have a serious impact on the value of your savings over the long term. To put this into perspective, if you had £10,000 of savings in a bank with an interest rate of 0.5% and inflation, which has averaged 2.7% in Gibraltar over the last few years, the value of your money would erode by 2.2% per annum. On this basis, over the 10 year period, the value of your money would reduce to £8,005.50.
It is often the case that obtaining a life insurance policy isn’t high up on ones “to do” list. There are, however, many benefits of such a policy. Put simply, life insurance provides a financial safety net, should the unthinkable happen.
On the whole, most people obtain life insurance to cover their mortgage and provide their family with the peace of mind that they will be financially secure should anything happen to them. This is particularly the case if the individual is the household breadwinner. However, life insurance can also be taken out in preparation for future costs such as weddings and funerals. Additionally, those individuals on the Allowance Based System are entitled to tax relief in Gibraltar, making life insurance even more affordable.
Moving from the UK permanently is a massive decision. There are a huge number of issues to consider and some of the financial aspects are as follows:
1. P85 - This is a form that allows you to advise HMRC that you have left the UK and possibly enable you to obtain a tax rebate. It needs to go back to HMRC
2. R105 - Another HMRC form which enables you to receive interest from relevant UK accounts without deduction of UK tax
Retirement should be a period in your life where you are not worried about your finances. Funnily enough, for most people, it’s only at retirement when they realise just how much, or indeed how little, they have saved over their lifetime. However, there is one simple trick to ensure you make the most out of your retirement – start saving as early as possible!
Increased life expectancy and an over reliance on the state pension has resulted in many people not making the appropriate provision for their retirement. By starting your pension early and allowing a significant amount of time for your pension pot to grow, you may well be able to live the retirement of your dreams. The state pension should play a part in your retirement provision but if you rely solely on it, you could be in for a surprise at how little you will have to spend on the things you imagined doing at retirement, such as going on a luxurious holiday or buying that new car you always wanted..
If you start saving into your pension early enough, not only will you have the benefit of time but you will also benefit from pound cost averaging over time. We explain how pound cost averaging can work to your advantage in an earlier article we published on our website. You can read this by clicking on the following link:
Contact us today to ensure that you can prepare yourself for the retirement you really want.
Trainee Wealth Manager
When you have money available to save or invest, it is worthwhile taking the time to consider whether you should repay or reduce any debts, you may have. You could inversely consider this as a risk free investment. Most Banks are currently paying in the order of + or – 0.5% interest on savings, but charge much higher rates of interest on mortgages, other loans and credit cards. So if you are paying compound interest of 19% on an outstanding credit card balance of £10,000, and you have this amount of money in your bank account earning 0.5%, why not consider repaying the credit card debt which will save you 18.5% interest?
To be in a position to earn an investment return of this magnitude, you would have to take a considerable amount of risk with your capital and could even lose some or all of it whereas, repaying the credit card debt produces a known and risk free outcome. You will also feel psychologically better.