Savings and Investments

There are many types of investment vehicles to choose from. Where you invest your money will depend on your attitude in respect of investment risk versus reward and future aspirations. You can invest for capital growth, income, tax efficiency or inheritance tax mitigation.

In this section, we briefly describe a number of the investment products available, however, as there are so many different types of savings and investment products it is always a good idea to seek professional advice.

National Savings Products

National Savings raise money on behalf of the UK Government and offer a broad range of investment options. Whilst these investment returns may not be the most competitive on the market and a number of the products involve you tying up your money for a lengthy period, the investments are consistently priced and some are tax free. In addition, all the savings and investment products are backed by H.M. Treasury, which makes them the most secure cash products available in the UK. The longer term returns however can be disappointing.

Individual Savings Account (ISA)

An ISA is designed to encourage new saving and was introduced in 1999 as a replacement for PEPs and TESSAs. They are attractive to investors seeking a tax-free investment vehicle with the potential for higher returns. There is usually a low level of minimum subscription and no minimum period of investment.

They are available to all UK resident individuals over the age of 16, however, you cannot invest in a Stocks and Shares ISA until the age of 18.

The objective of an ISA is to accumulate savings in a tax efficient manner since all gains are free from tax. This is particularly attractive to higher rate taxpayers. An ISA can contain cash deposits, investments in equities, bonds and collectives (see below).

Currently, the maximum subscription into ISAs is £7,200 in any one tax year. An individual can invest in two separate ISAs covering Cash, (maximum £3,600), and Stocks and Shares, (maximum £7,200, less what has been invested in cash).

You can make withdrawals from an ISA at any time without loss of tax relief. It is not possible to return sums to an ISA in that same tax year unless this falls within the annual "allowance".

Equities

There is little doubt that National Savings products, Cash Mini ISAs and Bank/Building Society deposits are less risky than buying equities, i.e. Stocks and Shares. However, when you buy equities you are investing in the shares of Companies which are listed on the Stock Exchange. In return for accepting a higher degree of risk there is the possibility of a potentially higher return and therefore equities possess an advantage over cash based products.

By investing into equities, you may be paid a dividend by the Company whose shares you have purchased, this dividend is a proportion of the Company's after tax profits which is distributed to shareholders. In addition, there is also the prospect of capital appreciation if the price of the share increases after you have purchased them, in that case you have made a capital gain.

However, share values can fall as well as rise which means you risk losing either all or a proportion of your investment if share prices fall.

Collectives

As an alternative to directly investing into equities, many people prefer collective investments such as Unit Trusts, Open Ended Investment Companies (OEICs) and Investment Trusts.

A collective investment is an investment where your money is pooled along with that of others, to create a large capital sum. A team of professional fund managers then uses this capital sum to build up a large actively managed portfolio of investments.

The collective investment approach enables you, indirectly, to hold a wide range of stocks and shares which would not be practical for an individual investor, while also minimising the effects on your capital of fluctuations in individual share values.

A collective investment is therefore, an ideal way of gaining access to expert full time investment management and reducing the risk and complications of investing directly into equities, whilst taking advantage of the additional benefits of the monies being part of a much larger investment portfolio with much larger individual investments, as well as more individual holdings. As with equities, you should view collective investments as medium to long term investments.

Unit Trusts

Unit Trusts are the most common type of collective investment. The investment is open ended, which means units are created every time an investor puts money in the fund and liquidated when they withdraw money.

This means the fund can react to demand and continually grow through prosperous periods, thus giving the investors more exposure to the advantages of larger investments, such as discounts. Conversely, during periods of poorer performance, the fund may need to sell assets to allow the investors to withdraw their monies, thus making the fund smaller.

A unit trust is a large fund of monies and or investments pooled together and controlled by trustees with the intention of attaining capital appreciation, income, or both.

Unit Trusts are made up of ‘units’. Each unit will have both a buying price and a selling price. The difference in these prices includes the fund management charges.

The number of units held, multiplied by the current price, gives the current value of an investors holding.

Open Ended Investment Companies (OEICs)

An OEIC works in a similar way to a unit trust, except that an OEIC is a limited company. OEICs are not trusts and therefore do not have trustees.

Unlike unit trusts, OEICs have a depositary, which holds all the securities and has similar function/duties to a trustee. Investors hold shares of the company (the OEIC), which gives them rights, like holding shares in direct equities.

The vast majority of OEICs have only one price, which is linked directly to the value of the underlying assets. In other words, the share price of an OEIC is the value of all the assets held, divided by the number of shares in issue. All the shares in an OEIC are bought and sold at this price.

Investment Trusts

An Investment Trust also works in a similar way to Unit Trusts and OEICs. The major difference being that Investment Trusts are companies listed on the London Stock Exchange whose sole purpose is to invest their shareholders funds in shares of other companies or securities.

Investment Trusts have a fixed number of shares, and the value of the shares do not directly reflect the value of the underlying assets, instead they are greatly correlated to supply and demand. Shares can therefore be bought at a premium, or at a discount to their net asset value.

As the number of shares issued is fixed, Investment Trusts, unlike Unit Trusts and OEICs, are Closed-Ended.

Knowing the number of shares and monetary value at the start of the trust allows the fund manager to plan ahead.

As an investment trust is a listed company, it has the capacity to borrow to purchase more shares. This is commonly known as gearing. This allows investment trusts to take advantage of situations or stocks without selling the current assets. The more an investment trust borrows, the higher the risk to the investors, but the greater the potential returns.

All of the above collective investments share the same taxation situation. As with equities, distributions of income, i.e. dividends, are paid to you subject to a 10% deduction for Income Tax. You will be notified of the tax credits associated with any such distributions and these will be treated as part of your Income for tax purposes. If you pay tax only at the basic rate, you will have no further tax to pay on the income from your investment. If however, you pay tax at the higher rate, you will have a further liability.

Authorised Unit Trusts are not liable to tax on Capital Gains made within the Trust. Gains made by investors from a Unit Trust investment will be tax free if they fall within an individual's annual exemption. At present the first £9,200 (this is usually revised every tax year) of an individual's chargeable gains (that is after deduction of allowable losses and indexation allowances) is exempt from capital gains tax. Gains in excess of this amount are taxed as if they were additional income in the year the gain is realised, however as of 6th April 2008 gains will be taxed at a flat rate of 18%.

Fixed Interest

Collectives can also invest in Fixed Interest securities such as UK Government Stock, also known as Gilt Edged Stock or "Gilts" for short. Corporate Bonds are also regarded as Fixed Interest Securities and this type of product usually has little or no equity content whatsoever.

A Corporate Bond invests in high yielding Sterling denominated Corporate and Government Bonds and this is essentially a loan which the investor, or bondholder, makes to the Company/Government for a fixed period. In return, the borrower regularly pays a fixed amount of interest over the life of the Bond. However, this income paid to the bondholder, i.e. you, is not fixed and may fluctuate.

A Corporate Bond (or fixed interest bond) usually carries less risk than equities , or Capital Investment Bonds (which invest in equities – see below), but there is still a degree of risk since Bonds can, and some do, fall in value. Traditionally, all types of Fixed Interest investment have been regarded as a safe option but it is also important to remember that not only do they fluctuate in price but there is a risk to you, the investor, if the Issuer defaults and cannot pay both the interest (coupon) or repay the principal when the Securities mature.

Capital Investment Bonds

As well as the collectives mentioned, an investor also has the choice of placing monies into a Capital Investment Bond / Life Assurance Bond (commonly referred to as ‘bonds’).

A bond is a tax efficient wrapper with access to a wide range of lump-sum investment options.

The investment aim of a bond is to achieve capital growth over the medium to long-term.

Many bond providers (Life Assurance companies) now offer a wide choice of investments, including unit linked investments covering a range of assets including shares, gilts(government bonds), corporate bonds and commercial property through their internal funds, as well as a large range of external funds through external investment companies.

The investment funds have the advantage of being professionally managed by the life assurance company and their selected fund manager.

The attraction to many investors in bonds, is their tax treatment. Bonds allow you to defer your tax liability. Any gains made are deemed to have had tax of 20% deducted at source (by the life assurance company). Only higher rate tax payers would have any further liability, the current difference being a further 20%. No Capital Gains Tax (CGT) is applicable as gains on the investment are treated as income in the year the gain rises.

Higher Rate taxpayers can withdraw up to 5% of their original investment per year, for up to 20 years, with no tax liability. The investor may have a liability on any gains made when they surrender (cash-in) their bond. Many investors defer surrendering their bonds until they are retired and have become basic rate or non taxpayers, thus avoiding the tax on the gains made.

For Unit Trusts, OEICs and Investment Trusts, the investor is entrusting his or her money to the judgement and skill of the Fund Manager.

The brief explanations of the various types of investments mean you can now seek advice as to which ones would be most suitable for you although this will depend on your personal circumstances and your risk/reward profile. We will always give advice and make a specific recommendation only after we have assessed your needs and personal circumstances.

Please be aware that the underlying stock selection will be based upon the risk profile and investment term.

The value of assets can fall, as well as rise, particularly in the short term. You may get back less than the original amount invested.