There is a vast array of financial products on the market today making
the process of analysing and planning your financial future complex and challenging.
Whatever your means, and whether you are looking to save on a regular
monthly
basis or to invest a lump sum of capital, it is important to realise
the options you have available and the risks associated with each.
Equity-based
investments in particular are intended as medium to long
term investments (usually considered to be five years or more). Because
they are equity-based, they are dependent on stock market movements.
It also means your capital is not usually guaranteed to be safe and so you
may lose some or all of it.
If the investment is a unit-linked one, its value can reduce in direct
relation to the stock market prices of its underlying assets, although
it can also rise. This means you may not get back all the money you invested.
If it is a with-profit arrangement, there is not the same direct link between
the underlying assets and the value of your policy. This is because the
insurance company holds back some profit from good years to offset losses
in poor ones - this is referred to as smoothing. The provider cannot
withdraw any reversionary bonuses declared, although your early withdrawal
may result in a Market Value Adjustment - effectively a financial ‘penalty'.
Banks and Building Societies
It is sensible to set aside a reasonable amount of cash for emergencies
- car or house repairs, for example. Bank and building society accounts
can offer instant access and are ideal for such 'rainy day' monies. Fixed
notice accounts similarly allow monies to be deposited at higher rates
of interest where the date on which funds will be needed is known in advance
- to pay for a holiday perhaps. In the long term though, bank and building
society returns are unlikely to match those offered by stock market backed
investments, although this may not be true always. However, the risks associated
with such investments are different.
National Savings
National Savings products offer total security for any capital you invest.
Income bonds can be ideal for both non-taxpayers and basic rate taxpayers
and pay a regular income.
Investors seeking capital growth can look to National Savings Certificates
(NSCs). Available in both fixed-interest and index-linked versions, NSCs
combine a guaranteed return with tax-exempt status. The interest rates
on offer however should be compared with other products. Because NSCs are
tax-exempt, there are limits on the amount you can invest in the different
types of National Savings bonds and certificates.
The Financial Services Authority does not regulate National Savings. Levels
and bases of, and reliefs from, taxation are subject to change and any
tax reliefs referred to are the current ones and their value will depend
on the circumstances of the individual investor.
Individual Savings Accounts (ISAs)
Individual Savings Accounts (ISAs) are intended to encourage saving by
those of even the most modest means. ISAs are tax efficient so investors
pay no income tax or capital gains tax on returns. Comprising up to three
separate elements which can be taken out separately (Mini-ISAs) or as one
(Maxi-ISA), ISAs offer a choice of investments in:
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Cash deposits through
banks, building societies and cash investment funds |
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Life Assurance - specialised
life contracts run by life assurance companies |
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Stocks and shares, including collective
investments such as unit trusts. |
You cannot invest in both a Maxi and a Mini ISA in the same tax year.
Levels and bases of, and reliefs from, taxation are subject to change
and any tax reliefs referred to are the current ones and their value will
depend on the circumstances of the individual investor.
Insurance Bonds
Life Assurance company bonds offer a wide spread of investments. Investors
can usually move money easily from one investment area to another (although
this may incur charges) and realised gains are usually tax free for basic
rate taxpayers as any tax due has been paid by the fund.
Gilts
Gilts are British Government bonds that can be bought and sold on the
stock market. Various types are available, most having fixed redemption
dates. A few, issued during times of crisis, are undated and will probably
never be redeemed. In the case of dated gilts, the investor knows how much
the Government will pay to redeem the bond and precisely when that payment
can be expected. In the meantime investors requiring access to capital
can sell them on the stock market. The price obtained may be more or less
than the Government would pay on redemption, depending on such variables
as interest rates and the rate of inflation. Capital losses are therefore
possible. For individuals, gilts are exempt from capital gains tax, so
profits are tax-free and losses are not allowable. Any accrued interest
in the sale proceeds is liable to income tax.
Levels and bases of, and reliefs from, taxation are subject to change
and any tax reliefs referred to are the current ones and their value will
depend on the circumstances of the individual investor.
Collective Investments
A Collective Investment is one where many people's investments are pooled
into one large fund. A collective investment allows the investor to share
in the assets of the fund. Such an investment enables an investor to have
a wide spread of investments within one fund.
Open Ended Investment Companies (OEICs), Unit Trusts (UTs) Investment
Trusts (ITs) are examples of collective investments. Collective investments,
which can be sold across national borders within the EU, are termed
Undertakings for Collective Investment in Tradable Securities (UCITS).
Investment Trusts
Investment Trusts are similar to unit trusts in that they offer all investors
a diversified portfolio of stocks and shares. Investment trust shares are
traded on the stock market and their value therefore rises or falls according
to supply and demand.
Unit Trusts
Some 1,800 unit trusts and OEICs offer the potential for income or capital
growth (or both) from stock market backed investments. Returns are less
certain than those from gilts or cash deposits. Risk is generally reduced
by the professionally managed spread of the investments within the fund.
Unit Trusts can be found which invest in most stock markets and investment
types. Unit trusts have two prices, the price at which you buy ("offer
price") and the price at which you sell ("bid price"). The
difference between the two prices is known as the 'bid offer' spread.
Open Ended Investments Companies
An OEIC, as its name suggests, is a company. To invest in an OEIC you
buy shares in the company. Its business is managing the investments of
its shareholders. As investors buy and sell shares, the size of the fund
grows and reduces. The OEIC does not have a set end date, and is not limited
by size. Hence it is known as an open-ended fund.
The investments making up the fund of the OEIC are valued and each
share represents an equal part of the investments. To pay for the research
and administration of the investments in the OEIC's fund, the company
takes an annual management charge. Sometimes a small charge is also levied
on buying and selling of the shares. However, unlike unit trusts, there
isn't a set bid and offer spread.
Offshore Funds
Many offshore funds are operated by subsidiaries of well-known onshore
institutions. Such funds are able to offer a wider range of investments
than their onshore counterparts owing to the differing regulation offshore.
Different types of regulation can mean less security but the very diverse
nature of the offshore market means that generalisation can be misleading.
A professional Independent Financial Adviser can identify well-run investments
that make the most of the tax advantages that offshore regimes have to
offer. Income distributing funds pay their income gross which is particularly
attractive to non-taxpayers. Where offshore fixed interest funds are structured
as companies, investors pay tax on dividends effectively at lower rates
than they would with equivalent onshore funds because corporation tax rates
tend to be lower.
The Financial Services Authority does
not regulate offshore investments.
Levels and bases of, and reliefs from, taxation are subject to change and any
tax reliefs referred to are the current ones and their value will depend on the
circumstances of the individual investor. |
Hedgelands Financial Services Ltd, Hedgelands, Abbotskerswell, Newton
Abbot, TQ12 5PW
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Telephone
0845
165 1280
General Insurance
0845 165 1281
Fax
01626 332622
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