Saving & Investments
Similar to mortgages and pensions, the range of investment products available to the average person is bewildering. As the safety and preservation of one’s hard earned cash is vital, it is wise to seek advice from a qualified and experience adviser to ensure that one does not fall into common pitfalls. However, we have provided an overview of some of the most common product options below.
Bonds
Bonds are single premium Whole of Life policies offered by many insurance companies and usually require lump sum investments. The amount of life cover is normally only minimal, and most are taken for investment growth and not life cover alone. There are different types of insurance bonds namely; Guaranteed (income or growth) Bonds, Stock Market Bonds and Unit Linked Bonds and With Profit Bonds.
Guaranteed Income Bonds (GIB)
A Guaranteed Income Bond (GIB) is a short-term life assurance contract guaranteeing a fixed income over a fixed term. The original investment is guaranteed to be repaid in full at the end of the term. The term is usually between three and five years. UK based GIBs are paid net of basic tax, which cannot be reclaimed even by non-taxpayers. Offshore GIBs are paid gross, and deferment of tax is permitted.
With Profits Bonds
The investment buys units in the insurer's With Profits fund. This fund invests in a wide range of underlying assets such as shares, fixed interest securities and property. Each year bonuses are added to the sum assured either by an increase in the price of units or by allocation of extra units.
Once declared these bonuses cannot be removed and are seen as one of the attractions of With Profits Bonds. This annual declaration of bonuses is known as 'smoothing', and protects the investor from the ups and downs normally associated with investing in stock markets. In years when the performance has been very good the life company will usually retain some of the monies in "reserves" so that in difficult years some level of bonus can be maintained for policyholders.
There is no fixed term to the investment. However, if the bond is encashed in the early years a penalty may be applied. Bonds that are not encashed early will usually attract a terminal bonus on encashment however in certain circumstances, for example after a sustained period of poor investment performance, a Market Value Adjustment may apply. This is a deduction that the Insurance Company may make when you cash in or switch your investment from, or between With-Profits Funds. It’s not a fixed amount, but is worked out on each individual With-Profits investment. Insurance Companies have designed the Market Value Reduction so that all investors get their fair share of the With-Profits Funds. It means that investors who cash in their With-Profits investment don't affect the value of others’ continuing investments. Normally Insurance Companies will deduct a Market Value Reduction in addition to any Early Cash- In Charges which may apply.
It is possible to take a regular income (monthly, quarterly etc) from With Profits Bonds by encashment of units.
Cash
An account with a bank, building society, post office or a financial institution which pays interest on balances held and often referred to as “cash deposits”, usually once or more times per year, the amount of interest usually depending on to the amount of money in the account and the 'base rate' of the Bank of England. There is often a notice period required for withdrawals of cash held on deposit and in most cases the longer the notice period, the higher the interest rate.
Savings accounts may seem simple and straightforward, but finding the best means digging below the headline figures and the marketing spin.
Traditionally, notice accounts, which require up to four months’ notice if you want to withdraw your cash, offered more interest than instant-access accounts. So you were likely to look for a notice account in order to get the most interest possible. But times have changed and nowadays; instant access accounts are often as competitive.
There are many different types of savings accounts to choose from. Our advisers can help you decide which account will work best for your hard earned nest egg.
It is a prudent and core ingredient of quality financial planning strategies to have accessible cash for short term contingencies, also known as the “rainy day”. Our expert view is that where possible, everyone should have short term savings to cover anything between three to six months of their earnings to meet this objective. While holding on to extra cash in a cash account such as a current account might be convenient, the extremely low interest rates – often as little as 0.1% - paid by big banks means that your money will not be working hard. Spare cash tucked away in the most basic of savings accounts could earn closer to 4% interest.
Establish your saving goals
If you are saving for a specific item or event such as a holiday, a new car, a daughter’s wedding etc, calculate how much you need to put aside each month to afford it. It is worth saving a little extra on top in case prices rise. Think about how long you can afford to tie your cash up for and whether you may need instant access. Tax can also be a factor. If your personal income is less than £5,035 per year (2006/07 tax year) then you will not have to pay tax on your savings. The 2006/07 allowance rises to £7,280 for those aged 65-74, and again by a further £140 for the over-75s.
Risk and reward: Considering the different saving options
If you like taking little or no risk with your money then basic deposit accounts may not promise the highest returns, but they do provide security.
Beyond the comfort of instant access is a range of accessible cash saving options:
- No notice accounts tend to offer slightly better rates than instant access because the account is usually run via telephone and/or post, and your money can take a couple of days to reach you by cheque or inter bank transfer.
- Internet-only accounts offer flexibility for web-surfing savers. They can often provide competitive rates because their costs are low. But if you like the security of telephone back up, find out whether this is offered and if you will be charged for calls. Plus, make sure you know how to get your money out. Many accounts offer higher introductory rates.
- Notice accounts generally pay you higher interest on the basis that you give notice for any withdrawals. You will have to wait between one and three months to get access to your money, although instant access is usually possible, subject to an interest penalty - of between 30 to 100 days - on the money you withdraw.
- Fixed rate accounts or savings bonds tie up your cash for between one and five years or until a specified date can secure the certainty of a fixed return. Accounts can usually be opened with between £1 and £5,000.As with notice accounts, early access to capital in these accounts is not usually permitted without incurring a penalty.
At the other end of the spectrum are schemes based on stock market performance. These offer the potential of higher returns when the market is good. The flip side is that your money may not grow at all and you may not even get all your original investment back.
Once you’ve decided on which kind of account is right for you, it’s time to check interest rates that you will receive on your money. Higher rates tend to be paid by banks that are internet-based or phone banks as opposed to branch-based. Online providers (banks), can afford to pay higher rate of interest because they do not have to carry the huge overheads and expenses of running branch networks. The fact that that they are offering to pay you higher interest on your money should not be construed either as being doggy or that they are desperate to have your business!
However, it’s not enough to simply pick the account paying the highest gross rate in a table. There are a range of tricks that banks use to get their accounts to the top of best-buy tables, which may mean you don’t get the interest you were expecting in the long run.
Bonuses are one of the most common ways of distorting the best-buy tables. This is where a higher, introductory rate is offered for a limited period, for instance six months, after which the account reverts to a lower rate.
So, for instance, the actual return over one year for an account with a six-month introductory rate will be the quoted annual equivalent rate (AER), but, if you hold the account for more than one year, the real average rate will be much lower than the AER.
Nothing lasts forever
Of course, bonus or no bonus, interest rates can change at any time, and your table-topping deal may no longer be as competitive after a few months.
There are other tricks providers use to lure customers. One is to launch a new issue of a product. Because there’s no money in the new issue, the bank can offer a higher interest rate than that available to existing customers, and with no requirement to tell existing customers.”
Collective investments
By collective investments, we are referring to products such as unit trusts, Open Ended Investment Companies (OEIC) and investment trusts. These products offer the opportunity to invest (together with many other people) in a pool of shares of different companies, that way diversifying investment risk.
In the case of unit trusts and OEIC, the investor buys a unit - part of a large fund which is itself invested in a variety of companies. An investment trust is a private company listed on the stock exchange and whose business is investing in other companies. In both cases the investor is putting his or her trust and money on the judgement and the decision making skills of the manager of the investment known as the fund manager.
Collective investments can also invest in fixed interest instruments such as government stock, also known as gilt edged stock or "gilts" for short, Corporate bonds which are also fixed interest instruments. Both represent direct borrowing on the part of the issuer of the bonds. They are referred to as "fixed interest" because their cost of borrowing is fixed, while the price of the bonds themselves may float up or down depending on supply and demand.
Traditionally, fixed interest investments have been regarded as a safe option. But it is important to remember that not only do they fluctuate in price, but also that the investor risks that the issuer may not be able to pay the interest (coupon) on the bonds, or the principal when the bonds mature. For this reason, there are different grades of bonds that a fund manager can invest in.
Equities (stocks & shares)
Investing in equities mean investing in the shares of companies listed on a bona fide stock exchange. However, equities do offer the potential for real return that deposit type products do not offer. By real return, we are referring to the probability that the value of your money will out perform inflation over the medium to long term.
Returns on equity investment is derived from two sources namely income by way of a dividend - a proportion of the company's after tax profits distributed to shareholders and also capital growth based on the increase in the underlying asset value of the company. If the price of the shares goes up after you buy them then you have made, on paper at least, a capital gain.
Equity investment carries greater risk that deposit savings due to the fact that price of shares in companies can go down as well as up, which means you risk losing some or all of your investment if the price of the shares falls.
Individual Savings Accounts (ISAs)
ISAs represent a tax-efficient wrapper into which one can put cash savings and build investments in equities (stocks & shares), bonds and collective investments.
There are limits to the amount of money that can be invested into ISAs (currently up to £7,000 per person per year) and there are two variants of ISAs known as Mini and Maxi although, it is not possible to invest in both a Mini and a Maxi within the same year.
Currently, up to £3600 per year can be saved in a Mini Cash (deposit) ISA, usually with a bank or building society and because it is an ISA, interest and growth is not taxable.
Up to £7,200 can be invested in a Maxi stock & shares element although to do so would mean that one cannot at the same time, in the same tax year save in a mini cash ISA.
From the tax year 2009/10 onwards new limits will be available for people age 50 and over or who reach 50 during the 2009/10 tax year from 6 October 2009.
From 6 April 2010 these new ISA limits will be available to everyone.
Please note that the value of the investment plans referred to and any income from them may go down as well as up and that you may get back less that the value of your investment.
National Savings products
National Savings products offer some of the least risky of investment options as they are backed by the UK Government. While investment returns of such products are not necessarily spectacular and some involve tying your money up for long periods of time, they are renowned for being stable and in some cases tax-free.
They range of National Savings products include Bank accounts, Savings Certificates, Premium Bonds and various forms of Savings and Income Bonds.
Armed with this basic information which is designed to take the myth out of the complexities of investment, are you now willing to ask the experts for guidance as to what is most appropriate for your situation and risk tolerance level? If so, contact us NOW!
“No investment is totally secure but some are more risky than others”
Legal disclaimer
These pages provide generic information about various aspects of financial services advice that we provide as well as possible areas of clients’ financial planning needs. We hope they are helpful to you but they do not, on their own, add up to proper investment advice and we cannot take responsibility for anything you do in reliance on them without further discussion with us. Please do not make a decision based upon the information contained within these pages alone. They are not detailed or comprehensive enough to enable you to make an informed decision which is tailored to your circumstances and needs. Please contact us now for tailored advice.