Windfalls
By IAN FORREST
HEN I think 1'11 spend it after all,' my friend said. 'It seems to me that "small savings" are only for people with big incomes.' After listening to his problem, I was forced to agree that this was truer than I had realised. The problem was deceptively straightforward what to do with a windfall of £400 if you don't want to venture on to the Stock Exchange.
get a windfall of £400 will want to invest it over a number of years, like my friend. A point investors have in common is the desire for security. But this means at least two things. Once upon a time investors went into small savings because there was no danger of their capital depreciating. Whereas one may buy an Ordinary share at 42s. and years later have to sell it at 32s., this danger is avoided in small savings. Put £100 into a building society and you know you will be able to get £100 back when you want to cash your deposit.
Now, however, investors of all kinds, big and small, worry much more about how to guard against the steady wearing away of the value of money because of inflation. The more or less continuous rise in the cost of living during the past fifteen years has left a deep impression on the British public.
And those who have tried to be thrifty have suffered most. In a letter to a newspaper recently it was pointed out that any- one who bought a 15s. National Savings Certificate in 1939 could now cash it for 23s. 6d. But in terms of what you could buy in the shops in 1939, the certificate was now worth only a little over 9s.
So the intelligent investor will scan the possible methods of saving very carefully to see where his money will retain not merely its nominal value, but its real value in the face of rising prices. And he will perhaps be shocked to discover that there is no way of doing this effectively apart from investing through the Stock Exchange. None of the channels of small sav- ing—with one slight exception —offers any resistance to the erosion of the value of money. The exception is Defence Bonds. Here an investor may buy £100 of the new 4 per cent. Defence Bonds and look for- ward to receiving £103 at the end of ten years. This is an appreciation of 3 per cent. in ten years. But there have been many years recently in which prices have risen 3 per cent. within twelve months. We Ci111 agree, then, that small savings are quite unattractive whilst inflation continues.
Nevertheless, for one reason or another perhaps out of habit, or lack of enthusiasm for other ways of saving, of for convenience, or from ignor. ance — people continue to put their money into small savings. There is a further explanation for this. To anyone paying tax at the standard rate, those kinds of savings which are free of tax are attractive. For in• stance, the effective rate of re- turn on Savings Certificates and on deposit accounts in a build ing society is 51 per cent. And a subscription share in a build- ing society will often yield a taxpayer the equivalent of over 6 per cent. These yields compare quite favourably with the return on many good Ordinary shares at the present momenl without .the risk of loss of capital.
In the face of these possibilities, the taxpayer will not pu a windfall into the Post Office or Trustee Savings Banks or a deposit account with his own bank, none of which yields even as much as 1 per cent. after tax has been deducted. The net yield on Defence Bonds is just over 21 per cent. Nor will he be lured by the apparently attractive advertisements in serted in the newspapers by finance companies paying 7 per cent. on deposits. This rate of interest, too, is subject to tax and yields only about 4 per cent. net.
So to the taxpayer there are real advantages in some of the small savings schemes. But how many people really pay tag at the, standard rate'? Putting it very broadly, a single person has to earn about £700, a married couple, without children must earn about £800, and a married couple with three children about £1,200, before they become liable to pay £100 in income tax. Clearly this excludes the great majority of people. And for them, the most advantageous form of saving is the one with the highest gross rate of return. Of the `official' savings, the new Defence Bond is now the most attractive, offering a yield of 4 per cent. (or 4+ per cent. if held for ten years and the bonus is included). By comparison no other official channel offers more than 3 per cent., except the Savings Certificate which, if held for ten years, offers fractionally over 3 per cent.
But the type of saving which has really achieved great popularity recently for non-taxpayers is the deposit with a hire-purchase or finance company. Some of these companies offer a return of as much as 71 per cent. on deposits. The investor would be well advised to make careful inquiries about the status of the particular company he chooses from this field. But with a rate of return double that for most official saving schemes, these companies will attract more funds.
The answer to my friend's problem seems, then, to be that if he pays tax he should look to the building societies (par- ticularly their share subscription schemes) or to National Savings Certificates. If he does not, an approach to a finance company or a purchase of Defence Bonds may be best. But many savers may still feel that even the best possible yield from their savings is not sufficient to make up for the steady decline in the value of money which has been going on for so long. For them, the best answer is to try to overcome their reluctance to investment on the Stock Exchange. Quite the most reassuring way to begin is to investigate the field of Unit Trusts. This is a .way of having one's savings invested for one by skilled managers in a wide range of British industrial and other shares. The record of one such trust, the M General Trust Fund, has been impressive. At present it yields a little under 41 per cent. to the non-taxpayer. More important, however, is that with this income the holder also stands a chance of protecting his capital. In fact since the Trust was formed five years ago, its units have appreciated in value by nearly 50 per cent. ft is an additional advantage of this par- ticular scheme that would-be investors can participate for as little as five shillings a week. Of course, it would also be possible for my friend to put his windfall of £400 into this or any other unit trust at once. This is what he decided to do!
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