A Savings and Investment Special!

0:00BBC Sounds. Music, radio, podcasts. Hello, I'm Martin Lewis and this is the cunningly named The Martin Lewis Podcast. I do wonder what that's going to be about. Now, usually much of it comes from our BBC Radio 5 live show with Adrian Charles. And this one is extra special. Oh, yes, indeedy. Because I'm on a break, so it's a good excuse for a Best Bits pod. The producers have put together what they think are some of the most pertinent and still relevant elements of the podcast we've done so far this year. Let's just hope they're right. Though worth noting, if I do mention specific products, do be aware they could have changed.

0:39So double check before you take any action. We don't want you listening to February's Best Buys once you're in August. This episode is a savings and investment bonanza. I did a beginner's guide to both, so we've morphed them together. Who should be investing where and how to maximise your interest from savings. Oh, I'm so excited. Just play the theme tune.

1:03I got to pay, so I'm going to work, work, work, work, never late. I got to pay, so I'm going to make sure everybody eats. These are my five questions people should ask themselves about their savings to help them decide what to do. OK, so here's the first one. Now, do I want to maximise every penny or decent, easy solutions? Is it about getting every penny or is it just about something easy? So this is about effort versus reward. Look, what most people want, I will be honest, is they want one or two savings accounts that pay them a good rate that they don't have to hassle or worry about. You want to be getting at the moment at least four and a half percent interest.

1:52You put your money away in it. You forget it until you need it. And it needs a little bit of managing. That's one solution. And we'll be talking about that. Then there are some people, and they tend to be people who listen to what I talk about, who want to maximise every penny. So you know every single penny of the money you're putting away in savings is earning the most possible interest. That will usually be, you know, think of a champagne fountain, Adrian. You know, you've got the glasses on the bottom and then the glasses above. And it goes up to the pinnacle of just one glass on the top. You know what I'm talking about?

2:20and then they pour the champagne in the top and it fills the first cup. And then once you've filled that one, it spills over to the next level. And if you're lucky enough to fill, well, that's what we're trying to do with savings in The Perfect Solution. You maximise every bit of savings in the one that pays the most. That'll be something like a regular savings account where you drip feed up to 300 quid a month at 7 % interest. Once you've filled that, you look at the next tier. And then once you've filled that, you go down in tiers. So every penny you've got is earning the maximum. Takes work, takes effort, takes monitoring, drink-take savvy.

2:51Decide at the start which you are. Are you an easy life and I want it to be pretty good or are you, I want to maximise it, maybe get a 20th or a 10th more on top because every single penny is perfect and I've got it all in my spreadsheet. You've got to decide that at the start. As you put your arms above your head then, I got quite distracted by the muscle definition in your arms. Thank you very much. Nice biceps. Thank you. Good guns. Sun's out, guns out. OK, second question. can I lock money away for years or do I need access? So this is a really important question. You're defining what you want with your savings.

3:27Are your savings something that you need to be able to use and spend or are they something where you can put them away for a defined time that you will absolutely not be able to touch them in that time? If you're going to be putting them away for a defined time, then you can take a fixed savings account. Now, in a fixed savings account, the interest rates tend, although they're not always, to be higher. and they're guaranteed. In easy access or no notice, which is where you can take your money out whenever you want, the interest rates are variable so they can move, so you need to monitor them.

3:57They can go down, they can go up, and you need to be on top of them. With a fixed account, you put money away for two years, you know exactly what the interest rate will be. It's locked in, it's guaranteed, but you can't access it. With the one exception of fixed rate cash ISAs, they're not allowed to lock your money away but if you take your money out of those you will lose some interest so it's really worth having that thought we're going to go through all the best products later but is the thought how much of my money do I need access to how much can I lock away I mean clearly you might have 30 grand you might say I want 10 grand of access to it and you should always have a rainy day fund of a few months of bills and I want 20 grand where I'm going to be locking I can lock it away and then I can get the guaranteed rate so I ask myself now am I putting new money aside regularly or is it all a lump sum?

4:44I'm really feeling the depth of the question. So this is a very simple one. I mean, if you're putting money aside regularly, there are special accounts called regular savings accounts that only allow you to put a relatively small amount of money in, up to£200 to£300 a month, but the interest rates are much higher. So that is a useful way to save. They tend to only last a year or so. There's a whole list of them. Alternatively, if you've got a lump sum, while you can drip feed it into a regular savings account to get the higher interest. If you're doing that, let's play it to the maximum. For most people, you'll just want to put it all in one place.

5:16Just a tiny little note, because lots of people get in touch with me about these regular savings accounts and say, it's a con, it's a con. I don't know why they use that voice, but they do. I don't know how they do it in writing, but they do. It's a con, it's a con. And this is the reason why they say that. Let's say it's paying 7 % interest and you're putting£300-ish in a month. At the end of the year, you've got£3 ,000 in the account. and they go, I've got three grand in the account, it's 7 % interest, I should be getting£210 interest. And they look in their account and they've got a total of£110 interest and they're going, it's a con, it's a con.

5:51What's actually happening is you only get paid interest on the amount that you have in the account. Now, if you think about it, you're putting in roughly£300 a month. Well, you only have£3 ,000 in for the very last day, the month before you had£2 ,700 in. You know, six months you had 14, 1500 quid in. So actually the way to think about it is I'm going to get roughly half the interest I think I would because while I've got£3 ,000 in at the end of the year, because these accounts normally last a year, my average balance over the year is about half that 1500 quid. So I'm going to get roughly 7 % of 1500 quid.

6:28But the crucial point about them is on the money that is in there, you're still getting the best interest possible compared to anywhere else. So if you were moving it from a lump sum account, so let's say you had your money in 5 % easy access savings and you were dripping that across into one of these regular savers, you're still earning money on the 5 % easy access savings while it is moving into the regular saver. So don't not use a regular saver because of that mass. You're still getting the most interest on whatever money you had in that account. Stop right there. I'm interrupting the pod because I just want to talk in a little bit more detail about cash ices while I've got a moment to do so.

7:09I've been doing this particular analogy since 2001 and it's not stale yet. I think it always works. So I'm going to do it for you now. I want you to picture a cake. We're going to think of it like a chocolate cake. That's going to represent cash savings, money in savings. So equally, it could be a strawberry cake to represent shares. Now, normally, when you've got money in savings account, the tax officer can come along and take a bite of the interest. Tasty. But all an ISA is, it's not a product. It stands for individual savings account. It is a wrapper, like a protective piece of cling film that you can wrap around your cake.

7:54The cake is still exactly the same chocolate cake. it's still the same savings account. If it's easy access, it's still easy access. You can take your money out when you want. If it's fixed, it's still fixed. The money is locked away with a guaranteed rate of interest. It's still just a savings account. The only difference is it now has this wrap around it. And that means when the tax officer comes along, oh, they can't bite it anymore because it's got the protective cling film around it. So when we talk about cash ISAs, people tend to think it's something different. My money's locked away. I can't change provider.

8:28No. A cash ISA is just a normal savings account where the interest is not taxed. You get£20 ,000 a year maximum that you can put in a cash ISA. Once it's in the cash ISA, it stays tax-free year after year until you take your money out. There's no tax when you take the money out. It's just then it's no longer in the ISA. You don't get the tax protection anymore. So if you were to have savings that were taxable and you put it in there, it'd be taxable. As long as it's in the ISA, it's tax-free year after year. So you could put 20 grand in this year. As long as they don't change the allowance, it's 20 grand next tax year, 20 grand the year after that.

9:02And people could have a lot of money inside cash ISAs, inside that cling film. Also, crucially, don't think when you've got your money in a cash ISA, that's it. You can't move it. You have a right to transfer your cash ISA. So that means if your cash ISA rate drops, and they will do, certainly if they're easy access or when you fix ends, you can simply go to a new cash ISA provider, you open it up, and within the form, you don't have to put any new money in, you fill in the transfer details. Most cash ISAs will allow you to transfer. It will then take the money from your existing cash ISA and put your money in that cash ISA, all within the cling film.

9:42You're never taking it out, you're not losing your tax-free status. And crucially, transferring does not count towards your allowance. So I said you're allowed to put£20 ,000 a year in a cash ISA. Well, if you've got an older cash ISA that you're transferring to a new provider, that doesn't change that£20 ,000 a year. The£20 ,000 a year is for new money. So hopefully, now you understand that cash ISAs are a piece of cake. I want to talk to you about the Help to Save scheme. It is by far the best paying form of savings you will ever get. And if you have access to it, it is the first place you should be putting your money.

10:20But interestingly, I haven't had any questions on it, which worries me that not enough people know about it. So I'm going to talk to you about it in brief here. The first crucial part about Help to Save you need to understand is it is only available if you are on universal credit and you work and you earn at least a pound. They've actually dropped the threshold recently of how much you need to be earning in order to get help to save. So it's now just a pound. And what it does is it gives you a 50 % boost on what you save, even if you have withdrawn the money. So anyone on universal credit, you should be opening this up, even if you don't have the money to put in it right now, because even if you were to get extra work that meant you were no longer eligible for universal credit, you would still be able to keep this account open once you've opened it.

11:05So here's how it works. You can save up to£50 a month in it. And after two years, you get a 50 % bonus on the maximum that you had in it. Let me try and explain that. So let's imagine you're maxing it out. You're putting 50 quid in a month. You've got 50 quid in, 100 quid, 150, 200, 250, 300, 350, 400, 450, 500, 550, 600. You've got 600 quid in. No, you've just had an emergency. Your window's been smashed. It's terrible. You're going to need to pay for it. It's going to cost you the whole 600 quid. So you do that, you take your money out of savings instead of having to borrow for it, and you therefore pay for your new window.

11:42Ignore, it might be more than one window. We'll call it cost 600 quid. You get the point I'm trying to make. Now you've got nothing in the account, and unfortunately you can't afford to put any more money in the account for the remaining two years. At the end of the two years, you get a 50 % bonus on the maximum you had in the account. Well, the maximum you had in was£600. So even though you have nothing in the account now, you still get a£300 bonus, even though you took the money account out. And then for another two years after that, you get another 50 % bonus calculated on the maximum balance you had in over the second two-year period compared to the first two-year period.

12:21Works in a very, very similar way. It's absolutely off the charts for people who use it. If you're on universal credit and you work, you should be opening a Help to Save account. It is by far the best form of savings possible. So that's the best bit of savings. Now let's do the best bit of investments. Take it away, Martin. OK, so I'd like to welcome, first of all, Valerie Wilson, who is a chartered financial planner at Johnson Carmichael Wealth. Valerie, hello. Hello. Thank you for joining us. And Louise Claro, Managing Director of Circle Financial Services and an independent financial advisor.

12:59OK, Louise, what do you do for your profession, for people who are the very basics and don't know what an independent financial advisor is? My role is to understand what somebody wants to do from a financial point of view and set a pathway up for them that may or may not involve regulated products. So banks, cash building societies, national insurance, that's all nice and easy. But you might start straying into things like financial advice. And I deal with that. So I set people on pathways and I'm what's called whole of market. So I can look at the entire universe within certain parameters that the regulator allows me.

13:37So what you can do, we should say the difference between advice and guidance, you give advice, is if somebody comes to you and you follow all the regulations, do a full fact find and get all the information off them, then you can tell them specifically what to invest in when we're talking about investments. You know, you could say this fund is a good one for you and mix with these two, couldn't you? Absolutely. And I think critically, it means then that if it goes wrong in the future and my advice and you took it turned out to be wrong, you have got recourse back to me. Although it's worth stating we're talking about investment here.

14:12So clearly you cannot know what is going to happen in an investment in future. What you're talking about is making sure that the risk is appropriate, Sermon. You know, there is still a chance that an investment can drop after you've recommended it. And you wouldn't be on the hook for that, would you? No. As you said, performance is not necessarily something that you can go and make a claim over. But if I put you into a fund that was clearly way high to risk and you told me in actual fact you were a more cautious investor, then you could potentially have recourse back to me and get your losses back.

14:47So, for example, someone comes in and says, I want to be cautious. I want to take a little bit of risk, but not too much because I'm getting, you know, I'm moving through, I'm getting a little bit older. I don't know quite where I want to go and I need to keep my money safe. And you said, let's put all your money in a single tech stock, which is about as high risk as you're going to get, a single share. I mean, clearly that would be inappropriate. But if you said we're going to put in a basket of global assets, which seems to be appropriate for you and this should do well, and it dropped in performance, you couldn't come back.

15:13Let's go to Valerie now. Now, you're a chartered financial planner. Can you explain the difference between that and an independent financial advisor for us? Yes, so where we start with when I see a new client is we understand where they are today and their objectives over kind of short, medium and long term. And we really build a plan for the future and make a plan as to how to meet all those objectives over time. Once we then got that plan, That's when we move on to the investment side of things, where we would recommend certain products and certain investments to meet those objectives over time.

15:48And similarly, we would have discussions around investment risk and sustainable preferences to work out what type of investments they should be investing in. OK, so that's what they do. It's worth me saying as well. Look, I mean, getting independent financial advice or chartered financial planner, they're professional services and you pay for them. They tend to be targeted at people higher up the income level or higher up the wealth spectrum. You do not need to go and get that help always. Those who have substantial funds, absolutely it is worth paying to go and get yourself advice, looking at the risk, looking at the tax implications, looking at your planning.

16:23But for many people, it won't be fundable. You can invest by yourself, though. There are platforms out there that will help you to do so. And you can be looking at this. So this isn't only for wealthy individuals investing. Let's start with a question. And we've had many, many questions coming in. Stephen says, I'm saving to retire in a few years. It's just sitting in the bank earning very little. I would never invest as I don't know enough about it and do not want to lose even a penny. So let me start on that. Stephen, first thing is sitting in a bank account is a terrible thing to do. As the very basic minimum, you should have your money in a top savings account or top cash ISA.

17:02There's no risk to putting it in savings. It's probably a good point to define the difference between savings and investing, actually. Saving is where you put your money in a financial institution. It has deposit protection, which means the amount you put in will never drop and you get a defined amount of interest. Now, the interest may be variable, so it may change over time, but you know what you're going to earn. So 4 % interest on£1 ,000 would mean at the end of the year you have£1 ,040 in it. Your money up to£85 ,000 per person per financial institution is protected by the financial services compensation scheme.

17:38So in the unlikely event a savings institution went bust, you would at least get that money back. What would tend to happen is your savings, they tend to move it to a different institution. Or investing where you're putting your money into shares or bonds in the hope that the amount that you have grows. It might grow because of dividends. It might grow because of capital growth so that you in future are able to sell it for more, hopefully substantially more than you bought it for. But there's no guarantee that you will be able to. That's the rough difference between the two. So, Louise, someone who says I would never invest as I don't know enough about it and do not want to lose even a penny.

18:15What do you say to them? Educate yourself. Now, if this person cannot afford to get financial advice, start looking at some quality FCA regulated platforms that will give you some really good help and advice. One of the places you could go to is Money Helper, which is a government sponsored website. And that just runs through exactly what risk is, the different types of categories of risk. What I would say is it is actually risky having all your money held in cash for the simple reason. ignore institutional sort of going bust or anything like that. Let's assume they don't and they probably won't.

18:51But each year that your money's in cash and not earning enough to keep pace with inflation, if this is for retirement, then the real value of it in 10, 15 years time is actually going to go down. So on paper, it might be the same pound, but the buying power is substantially less. So that is risk in itself. So I would just say that at the moment, the top savings do outpay inflation. but we had a long period where the top savings were actually losing because your money was eroding in inflation returns. Yeah. Over time, money will lose its buying power. And that's simply down to this horrible thing called inflation.

19:24So if you are going to invest or you're looking at drawing down over time, it is worthwhile having some money in something other than just cash, which at the moment is being outperformed by equities. Well, it's interesting because I phrase this as to save or invest. The answer isn't to save or invest. it's likely for most people to save and invest right what you want whenever you've got assets if you're lucky enough to have them is you want a spread of assets some of them you want in ready liquid cash which you want to have available which you should be saving some of you want in investments to grow the amount of risk you take depends on age and your financial circumstances but Valerie I suppose that the real concept we're trying to just do the basics at the beginning the real concept here is people think that they're going to put money in an investment and you know It's going to be incredibly volatile and it's going to move up and down.

20:12Well, the vast majority of standard investors are not putting money in an individual share. They're putting money in a fund, aren't they? And that's a collective investment which has loads of different products inside it. You could be doing a globally spread of assets where you're invested in thousands of companies. So one company doing badly won't have that big an effect. And you're looking at the net effect of all of them together, which over the long run should outperform saving. Yes, that's right. And I think it's important to define investment risk, because what we mean by it is, as you say, the volatility, so how much it will go up and down.

20:49But if you look at historical performance of investments, over longer periods of time, investments have always outperformed cash. It's just, in short terms, the value is going to go up and down. So one way to help reduce the volatility is to hold a very diverse portfolio. So what I mean by diversification is you need to hold it across different types of assets. So, for example, stocks and shares, bonds, commercial property, commodities. Right. Stocks and shares are effectively when you're investing in the value of a company. And so you own a portion of that company and you might get growth in the value of the company.

21:31In other words, someone will buy it off you for more than you bought it for. Or you might get dividends where if the company is making profits, it likes to distribute some of that to shareholders. What was your next one, bonds? Yeah, so bonds, you get government or corporate bonds. And essentially a bond is when you loan money to either the government or to a company. In return for the loan, they will pay you an interest over time. And at the end of the term, you will get a maturity value back. Commercial property is pretty obvious. but most people can't afford commercial property. Would you be investing in a portion of a commercial property?

22:06Is that what you're talking about? Yes, that's what I mean. You can get exposure to commercial property through holding funds. Right, so those are funds that are investing in a spread of commercial properties for you so that many people always talk about, I don't want stocks or shares, I prefer property. You can actually invest in property and you can invest in commercial property through a fund that is available to buy through the market. you don't actually have to go and buy the property yourself. Yes, that's correct, yeah. And the last one, commodities? So that's things like gold, oil and gas.

22:39Chocolate, sugar, port barrels, all of those things, commodities, stuff that you're sitting on and you're effectively, you know, you might have bought chocolate. The price of cocoa has gone up very rapidly over the last four years. If you bought it and held a nominal, a virtual stock, which is what investing is of cocoa, you might have made money from it. So that's investing. And it is about that spread, isn't it? And so, Stephen, the real thing is you're saying you don't want to lose any of your money. Well, there's always a chance, but you also want it to grow more quickly. And so what you have to do is look at how much of your assets you're willing to take some risk on.

23:12But the wider the spread of assets you have, the less you're likely to see really huge growth, the less you're likely to see really huge falls. That's right, isn't it, Louise? It is. And what I would just say here, Stephen, let's just pretend you're 58 and you're looking at retiring at the age of 60. That 60th birthday does not mean that on your 60th birthday, you're suddenly going to need however much is in your pension fund all at once. The reality is that pension fund that you've accumulated, let's just pretend it's£100 ,000. That's going to be drip fed to you over the next 20, 30 years. So do not worry about investing for the future, even though you think, oh, my God, I'm retired.

23:54I have to keep it all safe. No, you don't, because you only need to keep safe what you realistically think you're going to be drawing down over the next three or five years. Can you explain that term for us? Drawing down is where you take a monthly amount out of the pot of cash that you've got set aside for your retirement. Let's just say it's in a pension fund. It could be anywhere, but it's the amount that you are taking down each month. But the remaining capital, if that's not going to be used over the next two or three years, you need to think, OK, can I reasonably look at putting some of that into something that's going to potentially get me a better rate of return?