Independent Financial Advisors for IT Contractors
Published on 28th September 2009
With base rates at historic lows traditional savings accounts are offering very little by way of returns, yet the investment markets have bounced back strongly from the lows of earlier this year. This month we look at whether its time to revisit your appetite for risk versus reward.
When you leave the shackles of permanent employment behind to begin life as a Contractor, you should hopefully have the ability to earn significantly more money for your time. This extra income is all too often absorbed by increased outgoings as you take on a mortgage etc and this can often leave surprisingly little scope for investment. We are, however, living through unprecedented times and many clients have seen mortgage costs plummet and household bills dip due to the fall in inflation and all this means that many should have spare funds to put aside each month and save for a rainy day.
The question of what to do with this excess income can be tough and in
a recession it is easy to fear investment as a rocky road best left to
the experienced. There are opportunities for gain for even the most inexperienced
of investors but you just have to know where to look…
The key to investing during the recession is to spread your risk with a diverse portfolio. You should decide how much risk you are willing to take and choose your assets accordingly and spreading your investment over a number of sectors is wise in order to maximise your potential returns.
You might want to consider investing in different areas such as equities,
fixed interest, corporate bonds and even commercial property. Its also
vital to ensure that you aren't solely focussed on what may turn out to
be a relatively sluggish UK economy but whatever you decide to invest
in, drip feeding your contributions can help to minimise the risk to your
investment as any gains and losses are spread out over time. This is far
better than trying to time the market which can prove impossible for even
the most experienced investors.
Experts are predicting that we are now out of the bear market and since March have entered a run away bull market, where the stocks and shares that fell heavily during the fallout of the credit crunch begin to grow in value again. It is widely believed that the first shares to fall and the ones that fall at the fastest rate in a recession, are the ones to grow again and at the fastest rate when we come out the other side.
As such, investing in industrials, materials, emerging markets and consumer
discretionary stocks could see the highest returns over the coming months.
Investing during what must still be classed as a recession, is not for
the faint hearted so you should only invest what you can afford to lose
and you should be prepared to focus on the long term. Therefore, keeping
some cash aside to cover any unforeseen needs in the short term is a must
in order to fully benefit from your investment.
One of the most beneficial ways to spend it would be to invest for your retirement in a tax efficient pension as you get a bigger bang for your buck by virtue of the taxman boosting any money that you set aside.
As a Contractor, tax is the thorn in your side and making the most of any tax breaks offered by HMRC is essential. Since pension simplification came into play in 2006, Contractors have been able to invest almost all of their annual income in a pension each year with no Income Tax and National Insurance contributions or benefit in kind implications. This represents a very effective means of transferring money from contract into personal hands whilst also helping to ensure financial security in your retirement.
If the idea of not being able to benefit from your savings efforts until
retirement has put you off contributing large sums to your pension in
the past, then you may be interested to know that you can release funds
from your pension early. Contractors aged 50 or over (55 or over from
April 2010) can draw a quarter of your pension fund as a tax free cash
lump sum although there are a number of factors to consider before deciding
to do so as it will affect your income in retirement.
If you find yourself with money to invest but you don't know how best to use it to get the returns you want, then help is at hand. Our expert pensions and investments adviser Andrew Gains and Richard Braid can help you to make the most of your Contractor income, with independent financial advice on a wide range of investment options.
Steve BirchallThe whole process was so quick and easy with no worries...
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