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What are Regular Contribution Savings?
These are savings vehicles into which regular or monthly contributions are made to invest or build capital for a specific purpose in the future. This could be saving money for education, a house deposit, or even retirement. Besides building the balance of your money, many of these savings vehicles also earn reasonable interest rates that help build wealth.
Why are Regular Contribution Savings Significant?
- Helps build wealth: Regular savings are one of the best ways to increase wealth over time.
- Money earns compound interest: The monthly/yearly interest rate is compounded. This means you are earning interest on interest.
For example, you contribute £100 monthly towards a retirement investment. After the first year, you will have saved up £1 200 plus 5% interest of £60 = £1 260. After year two, you will have saved £2 460 plus another 5% interest of £123 = £2 583. You are earning annual interest on the total saved as well as on all the previous interest added each year.
Over 25 years, your capital would be £30 000, and the interest accumulated would be £29 550.
Over the long term, it is possible to double your capital saved just from the compound interest alone. This is one of the best vehicles for retirement savings.
- Allows investors to spread smaller investment amounts across a wider choice of funds – this allows you to get exposure to diversified funds with monthly premiums instead of a lump sum.
- Access to top fund managers at lower costs.
- Purchase funds at lower costs than investing directly with the fund houses.
- Reduces administration as there aren’t multiple fund managers.
- Benefit from unit cost averaging – this means buying into the fund every month where prices could be lower than a previous month. This could lead to buying more shares over the long run.
- One of the best long-term savings solutions.
Example of Unit Cost Averaging
Unit cost averaging refers to saving a fixed amount on a regular basis. It is an effective way to save and helps to ‘smooth out’ fluctuations in the value of your unit-linked savings plan.
This example shows how ‘Unit Cost Averaging’ works…
John invests £500 a month for one year into the fund. At the end of the year, John acquired 7,530 units. Currently, using the December unit price, the units have a value of £9,789 (7,530 x £1.30)
Simon, on the other hand, invested a lump sum of £6,000 in January. His investment acquires 6,000 units in the same fund. By the end of the year, using the December price, the units have a value of £6,500 (5,000 x £1.30).
Who would you rather be?
As you can see, by spreading his investments over the year, John is £3,289 better off than Simon. For the same investment, he has benefited from the effects of UCA.
Please be aware that this is only an example; in practice, charges would apply for fund management. These charges would have the effect of reducing potential returns. This example does not take into account inflation.
| John | Simon | |||||
| Month | Invested amount (GBP) | Fund Unit price | Units purchased | Invested amount (GBP) | Fund Unit Price | Units Purchased |
| January | 500 | 1.00 | 500 | 6000 | 1.00 | 6000 |
| February | 500 | 1.10 | 455 | 0 | 1.10 | 0 |
| March | 500 | 0.90 | 555 | 0 | 0.90 | 0 |
| April | 500 | 0.80 | 625 | 0 | 0.80 | 0 |
| May | 500 | 0.70 | 714 | 0 | 0.70 | 0 |
| June | 500 | 0.60 | 833 | 0 | 0.60 | 0 |
| July | 500 | 0.80 | 625 | 0 | 0.80 | 0 |
| August | 500 | 1.00 | 500 | 0 | 1.00 | 0 |
| September | 500 | 0.80 | 625 | 0 | 0.80 | 0 |
| October | 500 | 0.50 | 1000 | 0 | 0.50 | 0 |
| November | 500 | 0.70 | 714 | 0 | 0.70 | 0 |
| December | 500 | 1.30 | 384 | 0 | 1.30 | 0 |
| Total | 6000 | 7530 | 6000 | 6000 | ||
Disadvantages of Letting a Regular Savings Plan Lapse or Stopping Premiums
- Admin fees are taken regardless of whether premiums are paid or not.
- There will be less money to cover these fees, so in essence, it becomes more challenging to cover fees and make a return over a prolonged period – remember, premium holidays are set to 12 -18 months on plans, not indefinitely.
- The savings plan works best when fully contributed to as per all the terms and conditions provided in the brochure of the respective institution. Only expect the full benefit of the product if all premiums are contributed.
Types of Regular Contribution Savings
- Savings apps – many online apps are available that let you save monthly or as you have cash. Catalyst from deVere offers saving through investing in diversified funds at lower prices.
- Savings account – These are usually savings accounts you apply for or open with a bank, where you earn a minimal interest rate. They are ideal for short-term savings goals where you want to save enough for a specific item or purpose, like a new tv or a deposit for a car. They are not investment savings accounts ideal for capital growth.
- Savings plans – these are plans that commit you to regular premiums over a specific term.
- Mutual funds – mutual funds are an excellent way to invest in diversified funds with regular monthly contributions. It is a great way to build wealth for retirement.
- Retirement savings – This involves contributing monthly premiums over the long term to earn compound interest and grow your retirement nest egg.
- Education plans – these are regular monthly savings that accumulate for the purpose of paying for your children’s education. They are usually invested in interest-earning funds to grow your money.
Most of these products will have an interest calculator to project your cash balance over time based on specific interest rates. They are purely an estimate to give possible returns.
How to Invest in Regular Contribution Savings Products?
It is a challenge to save with the rising cost of living and inflation eating away at the value of our money. ‘When I have more money or get a bonus’ is a common reason not to save or to stop saving. Saving a regular amount, even a tiny amount, can add up to a large nest egg over time.
Time is your biggest ally in saving. Compound interest works, over time, earning you interest on interest.
Your financial advisor can provide regular savings solutions appropriate to your financial needs and circumstances.
Please note, the above is for educational purposes only and does not constitute advice. You should always contact your deVere advisor for a personal consultation.
* No liability can be accepted for any actions taken or refrained from being taken due to reading the above.
