For real growth  

Many of us have money in bank and building society accounts. We believe it provides a good rate of interest and is safe! This is not necessarily true.

You need to consider the real rate of return you have receive. To do this you need to deduct tax, and inflation.

• Interest of 4% after basic rate tax only amounts to 3.12%.

• Interest of 4% after higher rate tax amounts to just 2.4%

• If inflation exceeds the interest you receive then the value of your money in a bank account is falling in real terms

• Without continually monitoring your account's interest rate you could find yourself receiving a very low interest rate

It is true that a bank or building society account is the best home for keeping the money you may need access to. But if you have money you can invest for at least five years, then it is worth considering other types of investments.

Investment Products Available

ISAs
Oeics & Unit Trusts
Investment Bonds
With-Profit Bonds
Guaranteed Investments

ISAs

It is possible to invest up to £7000 into ISAs (Individual Savings Accounts) each tax year. The main advantage with an ISA is that there is no personal income tax to pay, and no tax to pay on any growth. 

There are two ways to invest in ISAs, either mini ISAs or a maxi ISAs. It is not possible to contribute to  both a Mini ISA and Maxi ISA during the same tax year.

Mini ISAs - The advantage of the mini ISA route is that it lets you take out the cash element with one company, and the stocks and shares element with another company. This should help you select the best provider for both the cash element, and the best provider for the stocks and shares component. It allows an investor to put up to £3000 into the cash element and a further £4000 into the stocks and shares element. The disadvantage of this route is that if you put just £1 into a mini cash ISA you will then only be permitted to invest £4000 into a mini stocks and shares ISA for the same tax year. 

Maxi ISA - If you opt for a Maxi ISA, you can invest up to £3000 in the cash element, and up to £7000 in the stocks and shares element, with an overall limit of £7000 each tax year. Both elements must be with the same provider, and the overall limit is £7000 per tax year. If you don't want to use the cash element, you could put £7000 in the stocks and shares element. If you only put £1000 in the cash element, you could also put a further £6000 in the equity element.

Cash element - This is nothing more than a bank or building society account, with interest paid without the deduction of tax. Like all other bank and building society accounts the rate of interest varies from institution to institution and from product to product, and much depends on the company and the terms of the account. 

Stocks and Shares element - This part invests in stocks and shares - (equities and bonds). It is generally suitable for those who can set aside their funds for at least five years. The potential returns from stocks and shares ISAs are greater than that of a cash ISA, since the underlying investments are shares and corporate bonds. The returns from a stocks and shares ISA are also free of Capital Gains Tax, and from any personal Income Tax liability. One of the most popular way of investing in an equity ISA is through a pooled investment, such as a unit trust or OEIC (see below).

Please note that tax concessions are not guaranteed and may change in the future.

Oeics & Unit Trusts

Despite the difference in name, a unit trust and OEIC (Open Ended Investment Company) are to all intents and purposes the same investment in the hands of the plan holder; a unit trust is set up under trust law; and an OEIC is governed by company law.

OEICs and unit trusts are pooled investments. This means that your money is pooled with the money of other investors. This in turn is invested in a wide range of shares, bonds, property or a combination of each, and it can provide a wider spread of assets than trying to invest it yourself.

This money can either follow an index or the fund manager can select the shares, bonds or properties. There are many different funds from many different companies, ranging from low risk to very high risk. As independent financial advisers we have access to the whole market place and can help choose the right fund, from the right company for you. If you want to know more than contact us now. 

Investment Bonds

Investment Bonds, also known as Insurance Bonds, are pooled investments. This means that your money is put into a pot with other people's money. This in turn is then invested in a wide range of different assets, which could be low risk to very high risk, depending on your attitude to investment risk.

In technical terms it is an insurance based contract and as such has a small amount of life cover, but its real use is as an investment to provide growth, or income, or a combination of the growth and income 

Investment Bonds - Tax Advantages

• There is no capital gains tax to pay for individuals

• The investment returns are taxed at source at basic rate

• Higher rate taxpayers don't pay higher rate income tax each year

• Higher rate income tax could be deferred or avoided

• A higher rate taxpayer, who expects to be a basic rate taxpayer in the future could avoid higher rate tax altogether

• Each year an investor is allowed to cash in 5% of the bond without higher rate tax to pay. If no withdrawal is made, then the allowance is carried forward to future years and it is cumulative

• Only after 20 years of withdrawals, or if the withdrawals exceed the cumulative 5% p.a. is higher rate tax potentially payable, but it would depend on your income tax position in that year

With-Profit Bonds

With-Profit Bonds are just Investment Bonds, but are invested in a with-profits fund. As a product they offer exactly the same benefits as described above for investment bonds.

But there has been a great deal of controversy about with-profit funds over the past few years, as many providers have started to apply Market Value Adjustments (MVAs) which are also known as Market Value Reductions (MVRs). This happened during the stock market falls, when the life insurance companies had with-profit investors whose stated fund values were greater than the true value of the underlying assets. In order to protect those who remained in the fund, a reduction in the surrender value was applied to represent the true market value of the assets held. So an investor could have received a statement saying his with-profit bond had a value of £50,000 but a surrender value of £45,000.

With-Profits and the future

If you are in a With-Profits Bond, (or any with-profits investment or pension), you need to consider your position very carefully as the future returns could be very poor.

Many providers have switched large proportions of their with-profits funds into low risk and therefore low return investments, and many have had to do this for regulatory reasons so the position is unlikely to change. This has meant that these funds have missed out on the recent upturn in the stock markets, and will not benefit from any future growth in the stock market. This will mean that bonus rates for these companies will continue to be low, and investors will see very little growth.

There is still a place for with-profits for some investors today, but much less so than in the past as there are many more guaranteed investments on the market which offer potentially better returns that a bank or building society account, without any risk to the initial investment. See below for details on guaranteed investments. 

Guaranteed Investments

More and more investors now want access to stock market linked investments without any risk to capital, and many providers have responded to this by designing products to meet this demand. The main features of Guaranteed Investments are:-

• They guarantee to return at least all, or a fixed percentage of the initial capital

• They are usually linked to one or several stock market indices such as the FTSE 100, or even a house price index

• There is usually a fixed term for these type of investments of at least five years

• They can be a good compromise for someone wanting potential stock market returns but with the security of a bank account

• There can be an inflation risk to the initial investment if there is no stock market growth over the term of the plan and just the initial investment is returned

• These types of investments usually don't benefit from the income derived from investing directly in shares

• Very often these plans are often ultimately invested in quite complex assets, and therefore may only be offered for limited periods or in tranches which once filled will be closed

How can we help?

When it comes to investing your money the choices are confusing, there are thousands of different funds to choose from, and a number of different ways to invest. So if you have money you wish to invest, and do not know where to look, we can advise you. .

We will discuss your, short, medium and long term objectives, and ensure we understand what you want your money to do for you. Only then will we look to research the marketplace for the most suitable solution with the most suitable company. Contact us for more details