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 Savings Certificates and various forms of Savings and Income Bonds.

Individual Savings Accounts (ISAs)

ISAs represent a tax-efficient container into which to place cash savings and investments in equities, bonds, collectives (see below) and insurance policies.

The cash portion, currently up to £3600 per year, is usually a deposit with a bank or building society and because it is an ISA, interest and growth is not taxable.

Unit Trust

This is an investment contract which invests in a variety of different stocks and shares and is divided into units which are issued to its members instead of shares.

OEIC

Open Ended Investment Company - Managed funds which hold a portfolio of investments which you can buy into. They issue shares instead of units and normally quote a single price.

Equities

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 shares falls.

Collectives

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 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.

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.

Endowments

These are a form of investment policy. Regular premiums are paid, and when the term of the endowment expires a lump sum is paid out. The lump sum may be used to repay a mortgage, for example. You should be aware that the amount the endowment will pay out is not usually guaranteed so there is a risk that it will not be enough to pay off the mortgage.

Most endowments have a protection element such that if the policyholder should die then a lump sum becomes payable.

Investment Bonds

Bonds are very versatile. As an investor, no matter what your attitude towards security and risk, there is an investment bond that will come close to matching your requirements. However, most bonds are designed for investment over at least five years. If you cash in your investment before that time, you are likely to be charged an early-surrender penalty.

These bonds are set up through insurance companies without the need for a check on your health status and normally people of any age can hold a bond.Bonds can be opened onshore (within the UK) or offshore (usually in the Isle of Man or the Channel Islands) to take advantage of tax concessions. The decision will depend on your personal tax situation.

Unit Linked Bonds
With Profit Bonds
Distribution Profit Bonds

Many policies provide not only protection but also investment. The principle here is that the premiums that are paid in respect of the policy are invested in order to benefit the policyholder or other beneficiary at a certain point in the future.

With-profits

A with-profits policy is a type of investment fund.

Policies that are with profits give the insured the extra benefit of a bonus that is a share of the profits from the funds that the premiums have been invested in.

How and where the premiums are to be invested is worth establishing if you are going to invest in a with-profits product, such as single premium insurance bonds for example. But as with all long-term investments in the stock market or in interest bearing instruments, it is important to stay with them for the long term. That way they have time to build up and "smooth" the short-term ups and downs in rates of return.

Some policies may also benefit from terminal bonuses if they are held for their full term. When choosing insurance products for investment it is important to be aware of what charges, fees or commissions may be attached to them and when profits and bonuses are added to the policies. Some, for example, will be heavily weighted with charges at the beginning of their policy life.

Child Trust Fund

Designed to encourage long-term savings for children, every child born on or after 1 September 2002 will receive a Government voucher for at least £250, to be used to open a Child Trust Fund.

The CTF is a new long-term savings and investment account for children. The Government will make payments to children through this account to help build up a useful stock of assets for when they reach the age of 18. The CTF accounts will help to strengthen the savings habit of future generations, spread the benefits of assets ownership to all, educate people in the need for savings and give young people a basic understanding of financial products.

From April 2005 you will be able to pay up to an additional £1200 each and every year until your child's 18th birthday. Friends and family will also be able to contribute towards the £1200 annual limit.

The Child Trust Fund will belong to your child. All funds, including any growth, will be free of any personal income tax and capital gains tax and available to your child when he or she turns 18.

We can select from the whole market of Child Trust Fund providers, whether you want a cash savings account or an equity fund that invests in the Stock Market.

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