The Christmas credit card statements have arrived and by now you should have either sent in a cheque to cover the minimum amount or gone further and decided to clear the debt altogether by taking out a modest bank loan: the 10 to 10.5 per cent APR lending rate from the main banks certainly makes a lot more sense to pay than the 25-27 per cent interest being charged by some popular credit and store cards.
With a clean saving or investment slate before you, you can now look at the saving options and prospects for 1999, and try to fit your needs and budget to the right product. There are two categories of savers/investors - those with a regular amount to save and those with a lump sum available. For the former, there is a range of savings accounts from the banks, building societies and Post Office available, but none of them is able to offer much of an annual return above 4.5 per cent gross. When tax and inflation are taken into account, you will be lucky to earn 0.5 to 0.75 per cent net interest. Frankly, such accounts are appropriate only these days for children and anyone who absolutely needs short notice access to their funds. Even then, you need ruthlessly to assess exactly how much you will need for your short-term needs and put the remainder into some other product or account that will earn you a higher return. PIPS and PEPS and variations of the same are worth considering for anyone who can afford to put £50, £80 or £100 away each month - the usual minimum amounts required. These policies are very flexible - you can stop and start your contributions without penalty; there are usually no upfront charges or associated commissions and your money is invested directly into the unit-linked managed fund (made up of stocks, cash, property and bonds) by the fund manager. You will be charged a higher than usual annual management fee with most PIPS and PEPS - usually 1.5 to 2 per cent per annum, but over a 10-year savings period, they should certainly outperform a deposit product. There are no guaranteed returns of capital or profits with PIPS and PEPS, but you should not have the short-term poor returns that have been associated with conventional, high frontloaded, open-ended savings policies so many of us bought in the 1970s and 1980s.
If you can afford a higher saving amount - usually a minimum of £80 or £100 - you may wish to take out the PEP version which tends to concentrate on equities rather than a mixed bag of assets and is a variation on the low DIRT Special Investment Accounts. At 20 per cent, the difference in tax to the PIP (at 24 per cent) is not as great as it was when these products were first launched, but the 4 per cent is better off in your pocket than in the Revenue Commissioners' pockets. If you take out a PEP, you must fulfil the Special Savings conditions laid out by the Revenue and the contribution ceilings may compromise your investment portfolio since you can only have one special investment product (as well as a Special Savings Account). Check with your product provider or broker before you open such an account. If PIPS and PEPS are not suitable - they need to be left alone for 10 years without too many payment interruptions to really build up a good return (reckoned today to be in the 68 per cent net region) - a better bet, but mostly for people with lump sums to invest, are investment bonds which usually require a minimum five-year commitment. The attraction of the with-profit or unitised with-profit version of these bonds is that the upfront charge can be as low as 3 per cent, though many also charge a 5 per cent bid-offer spread. Annual management fees tend to be lower than for PIPS and PEPS however - usually between 0.75 per cent and 1 per cent. With-profit investment bonds are attractive, especially to cautious investors because once the company declares its profits and announces the size of the profit bonus it will pay to its members or fund holders that year, the bonus cannot be taken away. Not even if the markets were to crash over the next few months. They also offer a guaranteed sum assured - an amount of money they promise to pay at maturity.
For regular savers the with-profit companies are still selling their endowment policies which also offer a guaranteed sum assured and annual bonus and final bonuses, but it is important to check the level of upfront charges and the impact of these charges (which will include commission) on the early values of the funds. Arranging such a product on a nil-commission or even a spread commission basis will improve the early value of the fund - just in case you can't keep paying the premiums for the full period of the contract.
A unit-linked fund or bond does not usually lock in profits every year; instead, the value of your units in the fund goes up and down, perhaps even on a daily basis, in line with the performance of the company or property shares or the cash and gilt values that make up the fund. Recent surveys are showing how the value of unit-linked funds and with-profit ones are beginning to converge as bonus rates on the with-profit ones come down.
Some of the major with-profit companies are now offering capital guarantees if you leave your money with them for five years or more and that may provide another level of security to the cautious investor. Your capital has always been at risk if funds were withdrawn prematurely, either as encashments or as higher than advised income or if there were a serious stock market crash.
Once again, make sure you discuss the upside and downsides of investment bonds with your adviser. And what sort of return do the pundits expect over the next 10 years from these bonds? Probably in the 7-9 per cent range, after tax.
Tracker bonds are another option for the lump-sum investor though the spectacular 7590 per cent average cumulative returns that were achieved over the five and six years up to 1997-98 are unlikely to be repeated for today's investors, mainly because of low interest rates and the high cost of guaranteeing the capital to the underwriter, nearly always a bank. The end of the bull run in international stock markets probably means lower overall growth performances anyway. Tracker bonds are appealing because they are relatively simple to understand: you invest your minimum £3,000 or £5,000 for usually three, five or six years. All or some of your capital is guaranteed provided the funds lie untouched, and depending on which basket of stock market indices are tracked, you benefit to a greater or lesser degree from the underlying performance of the indices. Very few trackers these days guarantee any profit return and many now cap the maximum return you will be paid. Unfortunately, the internal charges associated with the pricing of trackers are not very transparent, but advisers suggest that they work out at about 8 per cent of the total investment. This is quite expensive compared to direct stock market investments and many pooled investment funds, but investors need to keep reminding themselves that any guarantee carries a price. Nevertheless, tracker bond producers should be required to spell them out more clearly.
If your risk profile is such that you could handle more risk, there is a plethora of investment funds and unit trusts on the market, available from banks, building societies, stock brokers and fund management companies. Many unit-linked funds are invested in a mixed bag of assets - the ubiquitous managed fund - but there are many country, regional or sectoral funds to choose from now. These include a whole new selection of euro zone funds that are expected to do well, at least in the short to medium term as European companies expand and develop, privatise, merge and acquire each other - all to the benefit of the millions of pension-fund holders investing in them.
Business This Week has covered many other investment opportunities that have emerged in recent years - from antiques and collectibles to commercial property syndicates for high net worth individuals. The more common property version for thousands of people has been the Section 23 domestic property investments of recent years. These are still available, but without the generous tax relief package for landlords which they used to carry. Domestic property has been a spectacular success for those home-owners who bought into the market before the property boom began about four years ago.
The difficulty today is not just in finding the down-payment and income to pay for a family home, but in avoiding the debt spiral that occurred in Britain when its property boom of the late 1980s burst in the early 1990s. Negative equity - that is, where a house price falls below the value of a mortgage - is a very real risk. Despite all the hype from property brokers and estate agents, this market is as cyclical as the stock market and property can be just as sensitive to minor and major economic downturns. This is why taking the time this month to choose a viable and sustainable saving or investment product will be time well spent - ideally in the company of a qualified adviser whom you can trust and afford.
