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Mowatt Financial Planning: February 2010

Saturday, 20 February 2010

Savings and Inflation

The latest inflation figures announced during the week show that inflation has risen to 3.5% (Consumer Price Index) and 3.7% (Retail Price Index). This means that your savings have to work pretty hard to produce a real return.

In fact for a higher rate tax payer you need to be earning 5.83% and for a basic rate tax payer 4.375% just to be standing still in real terms.

Clearly these figures are for January and what's important is the future trend for inflation. From what I've read and heard the consensus is that we will continue to see inflation but it is likely to fall back from this level. This is confirmed by a You Gov expectations survey which has a 12 month view of inflation around 2%.

Below is a chart which shows the best rates available according to Moneyfacts:

What is important is when you will need any money you have invested. If it's more than 5 years you can afford to introduce a bit of investment risk with the aim of getting better longer term returns. If it's under 5 years you will generally want your money to be safe. If you are able to invest for 3 years or more, index-linked savings certificates are a good way of making sure your money holds it's value in real terms. The returns are also free of tax. There are two series available; one for 3 years and one for 5 years and both pay 1% above inflation. It's possible to invest from £100 to £15,000. You can get more details on the National Savings and Investments site.

Assuming inflation is at 2%, a basic rate tax payer would need to earn 3.75% and a higher rate tax payer 5% to get equivalent returns. There is also the certainty that if inflation is higher you will be protected against this. If you know that you can leave the money for 3 years, index-linked certificates look like a good option whereas if you know you will need the money sooner you have to accept that your money could be losing value in real terms.


Friday, 12 February 2010

Investment outlook

I attended a presentation by Invesco Perpetual yesterday which was very interesting. Key points of interest for me were the following:

  • 2009 was an easy year for investments as most markets made money; 2010 is likely to be different
  • Invesco view is that although Emerging markets offer good long term value they are currently expensive
  • UK will have to find around £100 billion a year to reduce debt
  • As a rule of thumb this will be £80bn of cuts and £20bn of taxes
  • The result will be low growth and weak sterling
  • Invesco view is that UK interest rates will stay low for 3 to 5 years given the other measures that will have to be taken
Invesco see opportunites around Global Bonds as they will give dollar exposure which should strengthen against the pound.

They also see opportunities in defensive stocks (Pharmacy, Telecomms, Tobacco, Utilities) which can be accessed through Defensive funds.

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