SAVINGS

The main objective of anyone making savings is to achieve a return ahead of inflation.

One of the most effective ways of doing this, with very little investment risk, is to make overpayments to a mortgage, or any other loans held if the interest charged is higher.

Overpayments

For instance, let us consider a mortgage with interest at 5%. Compared to making overpayments to that mortgage, any savings or investments made would need to return at least 5% per annum after tax and charges just to break even.

If loans are held charging higher rates of interest (i.e. credit cards, store cards), those should be paid off first.

With particular regard to overpayments to a mortgage, it is desirable for a mortgage to offer the flexibility to make overpayments without unreasonable charges or penalties, and also for any overpayments previously made to be accessible through a 'drawdown' facility, where overpayments can be lent out again.

Emergency cash fund

Once mortgages and loans have been considered, next comes the 'emergency cash fund'. Nobody ever knows when they might need to suddenly raise some money for an urgent event or need. Rather than be forced to sell existing assets, at perhaps an unfortunate time, it is prudent to have a cash reserve fund. Ideally this should be around 3 to 6 months earnings. A Mini Cash ISA can be used for this purpose and will allow interest to be earned tax free.

It is only once mortgage / loan repayments and the 'emergency cash fund' have been considered, that an investor should then consider how else to invest their money. If it is decided to invest into fixed interest stock, commercial property or shares, then an effective way of doing so is through collective investment schemes.

Collective investment schemes

A collective investment scheme allows an investor's money to be pooled with that of thousands of other investors, so that a fund manager can invest into a selection of stocks (typically between 50 and 100 stocks). Investing in a wide range of stocks reduces the overall exposure to risk.

The two most common types of collective investment are:

• unit trust

• open-ended investment company (OEIC) - also known as investment company with variable capital (ICVC)

From an investor's perspective, they are pretty well identical, they have similar charges and tax treatment. Usually they will allow a minimum regular saving of £50 per month and a minimum one-off investment of £1,000. As for accessibility, the investment can be sold at any time (although on rare occasions it can be difficult to sell investments in commercial property).

Income v accumulation investment

Most unit trust and OEIC funds will offer an income investment or an accumulation investment. The income investment will pay any investment income arising from your holding in the fund direct into your bank account. The accumulation investment will reinvest all investment income arising.

An investor looking for income would focus on income investments. An investor looking for growth would focus on accumulation investments. An investor looking for income and growth would use income and accumulation investments.

Investments into a unit trust or OEIC can be made through an Individual Savings Account (ISA), subject to annual limits.

For specific advice tailored to your own circumstances, we recommend that you seek independent financial planning advice.

For details of our Financial Planning Service click here.