Savings and investments
There are so many different types of savings and financial investments
that it is wise to seek advice.
National Savings products
Some of the least risky of investment options are those offered by
National Savings, which raises money on behalf of the UK Government.
While investment returns are not necessarily spectacular and some involve
tying your money up for long periods of time, they are nevertheless stable
and in some cases tax-free.
They include National Savings Bank accounts
and various forms of Savings and Income Bonds.
Individual Savings Accounts (ISAs)
An ISA enables you to accumulate savings in a tax efficient manner as all gains are free from tax, making them particularly attractive to higher rate taxpayers.
An ISA can contain cash deposits, investments in equities, bonds and collectives. Currently, the maximum subscription into ISAs is £11,280 in any one tax year. An individual can invest in two separate ISAs covering Cash, (maximum £5,640), and Stocks and Shares, (maximum £11,280 less what has been invested in cash). For UK equities, you are deemed to pay 10% dividend tax credit in stocks and shares ISAs which cannot be claimed back.
Both cash ISAs and National Savings products are certainly much less
risky than buying equities, that is to say investing in the shares of
companies listed on a stock exchange. However, equities do offer an upside
possibility that National Savings products do not.
You have the possibility of gaining not only a dividend - a proportion
of the company's after tax profits distributed to shareholders - but
also a capital appreciation. If the price of the shares goes up after
you buy them then you have made, on paper at least, a capital gain.
The bad news though is that the value of shares can go down as well
as up, which means you risk losing your investment if the price of the
That is why many people prefer collective investments such as unit
trusts and investment trusts. In both cases an individual is able to
invest in a basket of shares of different companies, that way spreading
his or her equity investment risk.
In the case of unit trusts the investor buys a unit - part of a large
fund which is itself invested in a variety of companies. An investment
trust is a company listed on the stock exchange and whose business is
investing in other companies. In both cases the investor is trusting
his or her money to the judgement and skill of the fund manager.
Collectives can also invest in fixed interest instruments.
These include UK government stock, also known as gilt edged stock or "gilts" for
short. Corporate bonds are also fixed interest instruments and 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
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.
Armed with these explanations of what types of financial instruments
there are to choose from, you can now seek advice as to which ones we
recommend as best suiting their risk and reward profile.