Category 7

1 – I have around £50,000 in cash savings in a building society account. How safe is my money?

From an investment risk perspective, money held in cash in a bank or building society account is considered to be very safe indeed. There is no ‘capital risk’ and you would expect to receive back the same amount you deposited at any time in the future. You are rewarded for keeping your money with the building society by the addition of interest to your account, which is really a form of income, so the value of your capital remains the same.

However, your money is subject to ‘institutional risk’, by which we mean the risk of the building society going bust. There is some limited protection in place for your money in the form of the Financial Services Compensation Scheme (www.fscs.org.uk). This is a statutory scheme which offers ‘last resort’ protection for savers and investors. Compensation is limited to £31,700 per person for cash deposits. This is based on 100% protection for the first £2,000 and 90% of the next £33,000. Therefore, in your case, an additional £18,300 of your capital would be at risk if the building society went out of business.

Because the compensation limit is based on each person, the only advantage of spreading your money between different bank or building society accounts is reducing the risk that all of them will go bust at the same time.

For more capital security you could consider savings accounts from National Savings & Investments. Money held in these accounts is completely secure as it is fully backed by HM Treasury. The interest rates on offer from National Savings & Investments are sometimes lower than the most competitive rates available on the High Street, but this is the price you pay for capital security and complete peace of mind.

2 – My granddaughter has recently started school and I would like to invest some money each month to help pay for her eventual University costs. How should I invest this money?

With such a long investment term, you should consider exposing the money to riskier investments than usual. Historically, the best long term returns have come from stock market investments in company shares and equities. Because you plan to invest monthly you will also benefit from a risk reducing factor known as ‘pound cost averaging’. This means that some months your money will buy more shares (when the markets are lower) than they do in others (when the markets are higher). Over the lifetime of the investment this make the investments less risky than they would have been in you simply invested a lump sum at the start.

Whilst the majority of your money should probably be invested in equities, you should also consider putting some in less volatile investments such as cash, fixed interest securities and property. This reduces the overall level of risk through a process known as ‘diversification’.

As your granddaughter gets closer to age 18, and the start of her University course, you should start reduce the level of risk you are taking with the investment by moving more of the money into less risky assets. This reduces the risk of the stock market crashing shortly before your granddaughter starts at University and you not having the time for the investments to recover in value.

In addition to deciding how to best invest the money you also need to consider the tax implications of the chosen investment vehicle. You should seek professional independent financial advice before deciding where to invest your money.

Martin Bamford is Joint Managing Director of award-winning Independent Financial Adviser (IFA) firm Informed Choice Ltd (www.informedchoice.ltd.uk).

He is also author of best selling personal finance guide, The Money Tree (£9.99, Prentice Hall Business). His second book, Brilliant Investing, will be published in November 2007 (£12.99, Prentice Hall). This article is provided for general consideration only and the information contained herein is not to be acted upon without professional independent financial advice.