Compound interest

Mrc44

Hi everyone ,
I would appreciate any advice/guidance from you wise people before I arranged to go see a financial advisor regarding my question.
I wish I had done it sooner and been more switched on regarding finances but better late than never (just entered into my 30’s :eek:). I am trying to read/learn ways to make my money work better for me. Where would people recommend to put a lump sum of between £10-15’000 and then £200mnth payments ongoing. I plan on leaving the money for 10+ years, hence the “compound interest” title. Currently sat in a Marcus account at 1.45% and was hoping it could do slightly better elsewhere?
Any help or guidance pushing me in the right direction to go read about certain S&S Isas etc would be greatly appreciated.
Thank you

NedS

What are you saving for? Something specific, a house, retirement?

At your age, I would be looking at a LISA or pension for your ongoing monthly savings once you have a suitable emergency fund of six months cash put aside.

Linton

There are 2 main things you can do with your money - save or invest.

Saving means using a bank account like your Marcus account. The advantage is that your money is 100% safe. The down side is that over the long term you will almost certainly lose out in real value because the interest is less than inflation. You wont get an interest rate that is life-changingly different to your current one.

The alternative is to invest. The down side is that at times you could well be showing a loss. The advantage is that over the long term you can expect an increase in value greater than inflation, possibly much greater. For investing to be fully justified you need to be thinking about 5-10 years at least to avoid selling at a loss or for lower than a savings account would have given you.

OK, so you want to invest:
1) ensure that you have an emergency fund of say 6 months expenditure in accessible cash. You dont want to have to sell your investments at a loss should you lose your job or have a large unplanned expense.
2) The easiest and most tax efficient way to invest is to use a pension. The downside is that you cant access the moey until you are 55, or probably 58 given your age. The upside is the tax gain, especially if you are a higher rate tax payer, or if you can arrange to be a non tax payer in retirement.

Are you and your employer making significant contributions to your pension?


Assuming your pension is sorted:

3) Your next option is to use an S&S ISA and buy one or more funds that invest in a wide range of different companies. This will avoid you making a major loss should one company go bust.

4) The problem now is which funds do you choose. The type usually recommended here is a multi-asset fund which invests in companies from across the world and in things other than company shares. These funds come in a range of risks - the higher the return the more likely the price will vary up and down significantly.

You may find it worthwhile looking through other postings in this forum as the topic is discussed many times or come back with specific questions.

Mrc44

Thank you for your reply,
To be totally honest I’m not currently saving for anything specific regarding that sum of money which is why I was just looking if I could potentially get a better return on it than the 1.4% at Marcus. If anything you could save it will go towards retirement. No mortgage and emergency fund is covered from higher amount in Marcus/123 account.
Thank you for any guidance it’s greatly appreciated

Alexland

If you are happy to tie the money up until retirement then the choice between investing in a Pension and/or Lifetime ISA will depend on your income tax rate and if you have access to a salary sacrifice workplace pension (which also saves the national insurance). Are you already contributing enough into a workplace pension to get the maximum employer contribution?

Alex

Mrc44

Thank you for your reply Linton,
Very informative and I will take all those options on board and look further into them , do you have any recommendations as to which s&s isa provider I should take more interest in or are they all roughly the same?


Thank you Alex ,
I am more than happy to sit on the money for 10years + , I was just looking for the best options I could find to grow my Money in the best way possible rather than the 1.4% Marcus account.
In terms of pension contributions I am now self employed so haven’t had any since becoming so, I’ve saved the money aside in the highest paying accounts I could find, 123 / Marcus. I am a higher rate tax payer so would a SIPP be my best option? The only slight niggle for me would be not being able to touch the money until I reach 58.

Appreciate all your help and guidance

Mrc44

I suppose my question in short is, where would you suggest best to put a spare lump sum of £10-15’000 to help it grow best over a 10year period as opposed to 1.4% in a current account. Would 4% be optimistic?

Aminatidi

Mrc44 wrote: »

I suppose my question in short is, where would you suggest best to put a spare lump sum of £10-15’000 to help it grow best over a 10year period as opposed to 1.4% in a current account. Would 4% be optimistic?

You won't get 4% without taking some risk on your capital.

That's probably the key question here, do you want a cast iron guarantee that the amount you put in will be there at the time you come to need it.

Alexland

If you are self employed as a higher rate taxpayer then contributing money into a pension (such as a SIPP or simple stakeholder) would give you 40% tax relief and then in retirement you would, under the current rules, draw 25% out tax free and the rest at your income tax rate in retirement. Think of it as deferring the taxation until a point in life when your income will be lower. If you are a parent it can also bring you back into eligibility for child benefit.

The tax advantages coupled with decades of compounding investment return makes it very attractive.

Alex

Dazed_and_confused

I suppose my question in short is, where would you suggest best to put a spare lump sum of £10-15’000 to help it grow best over a 10year period as opposed to 1.4% in a current account. Would 4% be optimistic?

Well for a start if you put £10,000 into a SIPP or personal pension the pension company, courtesy of HMRC, will immediately add 25% giving you £12,500 in your pension fund.

Your basic rate tax band is increased by £12,500 so it may personally save you some tax when you file your 2019:20 Self Assessment return.

NB. This is assuming you really are "self employed". A lot of poster on here claim to be self employed and subsequently admit they're not. Which can make a huge difference when it comes to making pension contributions.

Mrc44

Thank you for your reply’s ,
Regarding the risk to get the 4% I am happy with that which is why I thought taking £10-15’000 out of a current account at 1.4% and leaving it for 10+years would be more beneficial and my money would grow better elsewhere over that time frame.
Would a s&s isa perform as good as a SIPP over such time frame? I like the sound of the tax relief on the SIPP and will be looking to open one and contribute each tax year from now on for sure but It just niggles slightly that I can’t touch the money until I reach 58. (Dazed and confused) I am absolutely self employed and file my tax returns I can assure you on that.
Would something along the lines of this be any good : open a s&s isa and deposit £10’000 lump
Sum then leave to compound over a 10+yr period to ride out any dips and hopefully get that 4%

Open a SIPP and contribute £5000 lump sum per year and top up with £200mnthly contributions

Does that sound a good idea , tell me if I’m being clueless and stupid here.
Appreciate all your help.