protecting £40k against declining pound?

caroline1973lefty

Hi there, I would be grateful for some advice as to what to do.

I have a lump sum of £40k, but may need quick (not neccessarily instant) access to most of this over the next few years, depending on how things go in my new freelance career - its too early to say at the moment but i'm definitely going to need to dip into this money for the next year, at any rate. But no dependents and fairly low living costs (i'm just renting, little prospect of getting a mortgage due to uncertain income).

So far I've taken out one of the cash ISAs recommended here and planning on putting the full £5k in one at the start of the new tax year.

Beyond that, I have a few ideas, but not sure if any of them are very good! What do you think? My main aim is to protect my purchasing power against UK inflation, which i expect to rise, but also against the declining pound, as i am not sure if i'll even stay in the UK long term, could see myself relocating to Europe (not necc eurozone) someday maybe.

1. just leave all my money in whatever decentish high interest account i can find - was going to go with ulsterbank - but even this is below inflation.
OR some combination of that plus some of the following:
2. put about 10% of my money ie £4k into buying gold (sovereigns or britannia coins).
3. buy some index linked savings certificates, maybe just £5k or so.
4. buy bonds (have to say i don't really understand these and get bored when i try)
5. buy a stocks and shares ISA - either a FTSE 100 tracker or a self invested one (i find thinking about companies more interesting)
6. just buy some shares without it being in an ISA (as i'm unclear whether there is actually any tax advantage to having a shares ISA now, given that i won't be earning over the CGT levels for a while anyhow). However am totally new to this whole area so not sure how to avoid getting stung for lots of trading fees.
7. Buy shares in companies priced in currencies that i think will continue to appreciate against the pound. Not sure about the dollar. Norway looks pretty stable!
8. invest in some foreign currency in a foreign currency account like HSBC or Bank of Ireland
9. loan through zopa
10. stock up on staple foods!

Any advice?

opinions4u

If you are so sure the pound will continue to decline, move your money in to those foriegn currencies that you believe will appreciate.

john_s_2

If you'll need access to the cash then tying it up in shares, via a fund or otherwise, wouldn't be a good idea IMHO. You might find yourself needing to sell during a trough. Conventional wisdom says that shares (or funds that invest in shares) should be regarded as five-year minimum investments (absolute minimum!).

Index linked certs will protect you against UK inflation (I like them for that reason) but won't be suitable for the whole sum as you want access to some of it (you can cash the certs in early but less than a year and you don't get any interest). But if you can judge how much you think you can safely tie up for a year (or more) then they're a good a place as any - if protecting your cash against UK inflation is your main concern, and you consider the RPI to be a suitable measure.

Alternatively consider how much you can tie up for one, two, three (etc) years and investigate the fixed-rate accounts out there (often called bonds). But bear in mind that savings-rates (and/or RPI inflation) might sky rocket in that time. Or they might not.

For the remaining sum (the amount you want instant access to) then put it in the best instant access account you can find. And move it around as other accounts better it.

I can't comment about the exchange rates with other currencies. As opinions4u implies, if you know which way these are going then you'll never need to work again! (Just become a currency trader.)

There will probably be someone along soon who will advise buying loads of gold with it.

DiggerUK

caroline1973lefty,
Until recently you could match or beat inflation in bog standard savings, that seems to be a thing of the past now. But you should max out your Cash ISA's, readies are always needed easy access.

What you do now is governed by when you will definitely need access to funds.
Gold and NSI Index Linked are my favourites, but I have a long time frame before needing to cash in.
To get best advantage of NSI IL you need 3 years, and would need similar for gold. Remember returns on gold may not be the same as recently, when you could do nicely in a few months.

As to other currencies and paper investments, well, only if you see green shoots, and are convinced that other countries have not been printing funny money hand over fist as well.
Have a good look, at what I would say is a daft idea, when you have been off the cherryade for 72 hours and lowered your sugar consumption.
I see no green shoots, and lots of funny money.

Best of fortune.

smug

I'd certainly bung 10k into 'safe' stocks like BP, Tesco, Vodafone etc...Bit of a risk, but you'll get dividends and it'squite fun. No guarantees of course, but anything is better than leaving it in a bank at 2% and letting them lend it out at 10%.

tradetime

caroline1973lefty wrote: »

Hi there, I would be grateful for some advice as to what to do.

I have a lump sum of £40k, but may need quick (not neccessarily instant) access to most of this over the next few years, depending on how things go in my new freelance career - its too early to say at the moment but i'm definitely going to need to dip into this money for the next year, at any rate. But no dependents and fairly low living costs (i'm just renting, little prospect of getting a mortgage due to uncertain income).

So far I've taken out one of the cash ISAs recommended here and planning on putting the full £5k in one at the start of the new tax year.

Beyond that, I have a few ideas, but not sure if any of them are very good! What do you think? My main aim is to protect my purchasing power against UK inflation, which i expect to rise, but also against the declining pound, as i am not sure if i'll even stay in the UK long term, could see myself relocating to Europe (not necc eurozone) someday maybe.

First off, by your own admission, your future and money access needs are uncertain therefore you should be careful how you tie your money up. Fixed term savings accounts allow you to plan, because you know exactly what you will have access to and when. On the surface some combination of these would seem the safest way to go. Speculative activities require you not only to be right in your speculation, but also to keep the money tied up until such times as that speculation is proved correct. Given the uncertainty of your access requirements this adds risk to them in your case.

caroline1973lefty wrote: »

1. just leave all my money in whatever decentish high interest account i can find - was going to go with ulsterbank - but even this is below inflation.
OR some combination of that plus some of the following:
2. put about 10% of my money ie £4k into buying gold (sovereigns or britannia coins).

Gold is considered a way to preserve value, but it is important to understand that it is also a speculative product, and as such it will swing between undervalued and overvalued. Worst case is you buy it when it is overvalued and are forced to sell when it is undervalued, in such circumstances it will not have preserved your wealth. Just something to consider.

caroline1973lefty wrote: »

3. buy some index linked savings certificates, maybe just £5k or so.

Would seem to be a good way to protect against the effects of inflation, and since they have fixed time period you will know when you can have access to your money

caroline1973lefty wrote: »

4. buy bonds (have to say i don't really understand these and get bored when i try)

I would avoid things that you don't understand, particularly if you find the effort to understand them boring.

caroline1973lefty wrote: »

5. buy a stocks and shares ISA - either a FTSE 100 tracker or a self invested one (i find thinking about companies more interesting)

In your case a better route than bonds then, perhaps, remember you are speculating here, direction and time once again come into play.

caroline1973lefty wrote: »

6. just buy some shares without it being in an ISA (as i'm unclear whether there is actually any tax advantage to having a shares ISA now, given that i won't be earning over the CGT levels for a while anyhow). However am totally new to this whole area so not sure how to avoid getting stung for lots of trading fees.

If you are unlikely to breach CGT allowances then the immediate advantages are debatable, however there is always the future to consider, the tax advantage for a high tax rate taxpayer can be considerable, and assuming ISA's survive may be much better in the future as the country raises taxes to deal with the rising deficits. Unless trading is your business, then you should avoid excessive trading to avoid lots of trading fees.

caroline1973lefty wrote: »

7. Buy shares in companies priced in currencies that i think will continue to appreciate against the pound. Not sure about the dollar. Norway looks pretty stable!

Not sure I would worry too much about that, it takes you into the world of currency speculation, and often countries tend to competetively devalue their currencies anyway, buying shares in foreign currencies is further complicated by currency conversion fees at purchase and liquidation. A better way would be to target companies who derive a lot of their earnings from overseas if you want to cover that base.

caroline1973lefty wrote: »

8. invest in some foreign currency in a foreign currency account like HSBC or Bank of Ireland

Pure currency speculation, with conversion fees.

caroline1973lefty wrote: »

9. loan through zopa

Don't know anything about that

caroline1973lefty wrote: »

10. stock up on staple foods!

Always a reasonable idea to have a reasonable stock of non perishable foodstuffs, but don't go bunker mad

You appear to be embarking on a freelance career, success in this area should be your paramount concern and occupy the lions share of your time

missile

If you continue to work and live in the UK it is best to limit your thoughts to sterling savings / investments. There are often significant and rapid currency fluctuations and you need to be prepared to accept significant risk before you invest (or I would say gamble) buying foreign currency.

amcluesent

>9. loan through zopa<

That's quite illiquid, you're money is really tied up for 36 months.

lingwood

caroline1973lefty wrote: »

, could see myself relocating to Europe (not necc eurozone) someday maybe.

Just stick it in a bank! With a good rate/use your ISA's

You have way to much uncertanty in the tone of your email to know what even you want.

And after all are things realy going to chnage that much? I suspect not. +/- even a few % is nothing major on 40K

Gorgeous_George

I have just over £4K in Zopa. It is true that the money is tied up but my £4K is being returned at a rate of more than £150 per month (which I re-lend). So with £10K I'd expect £375 per month to be coming back in which could be withdrawn if necessary. So it is not as illiquid as a bond for example but not as liquid as instant savings or a cash ISA. However, the rates are better. At present you could lend to the least risky 36 months market at 8% before fees (1%), bad debt and tax. 5.5% after tax is not impossible if you are careful and suffer only average bad debt. After a year I have no bad debt in the Zopa Markets (but I do have one from Listings).

My largest lump of savings (£30K) is going into NS&I when the West Bromwich Bond matures at the end of May. I intend to add £200 - £300 per month to Zopa.

I suppose I ought to sort out an ISA before 6 April - a job for the weekend perhaps.

GG

jamesd

caroline1973lefty wrote: »

i'm definitely going to need to dip into this money for the next year, at any rate.

Zopa is unsuitable for money you may need rapid access to because it provides no ability to immediately access any of the lent money, just a regular stream of money being returned to you.

Gold, shares or funds are accessible but for urgent need you might have to sell at a significant loss if the markets turn against you. Bonds are more suitable for rapid access because they are less likely to move by large amounts and offer access either immediately or within a few days for bond funds.

caroline1973lefty wrote: »

My main aim is to protect my purchasing power against UK inflation, which i expect to rise, but also against the declining pound

caroline1973lefty wrote: »

1. just leave all my money in whatever decentish high interest account i can find - was going to go with ulsterbank - but even this is below inflation.

Good for rapid access, you should keep some like this. Doesn't protect against a falling Pound unless you use a foreign currency account, but you can get Euro or US Dollar currency accounts easily. Doesn't protect against inflation.

caroline1973lefty wrote: »

2. put about 10% of my money ie £4k into buying gold (sovereigns or britannia coins).

Pretty speculative and over the timeframe you're looking at you're more likely to lose money than gain because gold is currently in one of its periods of periodic high prices.

caroline1973lefty wrote: »

3. buy some index linked savings certificates, maybe just £5k or so.

Good for inflation protection and offer rapid access, though with some loss of interest. No value for protection against a falling Pound.

caroline1973lefty wrote: »

4. buy bonds (have to say i don't really understand these and get bored when i try)

That's unfortunate because international bond funds would be very suitable for addressing the risk of a falling Pound and for the index-linked ones against inflation. They also offer rapid access and interest free payment of interest if bought within a S&S ISA.

caroline1973lefty wrote: »

5. buy a stocks and shares ISA - either a FTSE 100 tracker or a self invested one (i find thinking about companies more interesting)

The ISA is just a tax wrapper, it can hold bonds as well. Shares are potentially interesting because you can use non-UK shares, or non-UK funds, including offshore funds that are valued in Euros or Dollars.

caroline1973lefty wrote: »

6. just buy some shares without it being in an ISA (as i'm unclear whether there is actually any tax advantage to having a shares ISA now, given that i won't be earning over the CGT levels for a while anyhow). However am totally new to this whole area so not sure how to avoid getting stung for lots of trading fees.

For funds, discount brokers like Hargreaves Lansdown are good, with little or nothing in fees. For shares, HL isn't the cheapest but isn't too bad. The ISA wrapper means you don't need to worry about going over £30,000 of total sales in a year and having to report all your trades to HMRC so they can check that you aren't subject to CGT. It's a useful administration reducer.

caroline1973lefty wrote: »

7. Buy shares in companies priced in currencies that i think will continue to appreciate against the pound. Not sure about the dollar. Norway looks pretty stable!

That's a sensible approach for protection against a falling Pound and potentially inflation.

caroline1973lefty wrote: »

8. invest in some foreign currency in a foreign currency account like HSBC or Bank of Ireland

A good approach to protect against a falling Pound.

caroline1973lefty wrote: »

9. loan through zopa

Unsuitable for any of your objectives, it locks your money up, doesn't protect against inflation (it's a fixed interest rate for the life of loans) and is in Pounds.

caroline1973lefty wrote: »

10. stock up on staple foods!

Always good to have supplies of staples so you aren't forced to go shopping when you don't want to!

caroline1973lefty wrote: »

Any advice?

Combinations are a good idea.

You might like to investigate Preference shares and building society PIBS (Permanent Interest Bearing Shares). Newcastle Building Society currently has one that can be held in a S&S ISA that's paying around 10.5% tax free inside the ISA. Rapid access possible, though the market can be a bit illiquid. The capital value will drop if inflation picks up.

Gorgeous_George wrote: »

So it is not as illiquid as a bond for example but not as liquid as instant savings or a cash ISA.

Bonds can be sold within seconds and bond funds within a day. Zopa is less liquid than bonds, doesn't offer the opportunity to use foreign currency bonds and doesn't offer the option to use index-linked bonds. It locks the money up for years at a fixed rate, that doesn't change if inflation and general interest rates rise. It fails to address any of the objectives sought by caroline1973lefty.

Gorgeous_George wrote: »

the rates are better

No, the rates are not generally better than the rates offered by bonds. It's possible, with limited amounts of money, to get better rates than the 12% offered by one bond fund, but that can be held in a S&S ISA to pay out tax free, unlike Zopa. For the lower risk Zopa markets usually, now may be an exception, it's not possible to move significant money at Zopa at rates, after tax, in excess of the 7-8% readily available tax free from a number of bond funds or bonds that can be held inside a S&S ISA so they pay out tax free. Your own rates illustrate the problem - you're not getting rates that match the higher paying bond funds and your returns are taxable.

Gorgeous_George wrote: »

I suppose I ought to sort out an ISA before 6 April - a job for the weekend perhaps.

You really should spend a bit of time learning more about bonds and bond funds. They are pretty good products, usually better than Zopa unless you change your strategy to do what I do and hold out for the unusually high rates that Zopa can sometimes deliver. The tax free payout when held inside a S&S ISA is particularly nice.

Since you're willing to tie up your money for years you might also find it interesting to look at the 30% tax rebate you can get from using VCTs. You get the tax rebate early in the new year and the interest/dividends paid by the VCTs are payable interest free, with expected rates in the 4-8% range depending on the VCT. If you put the money in a VCT at the start of a new tax year instead of the end, instead of getting a rebate your tax code is reduced. £5,000 in and £1,500 of the return back in a few months from HMRC is a pretty good deal. But they are high risk product, even those that concentrate on paying income are still investing in small companies even though they are mostly secured on property and other assets. Though those secured ones are lower risk than Zopa because of the security - mortgage effectively - taken.