What type of investment accounts are available?
Available from most high street Banks and Building Societies, these types of account offer a high level of security. Normally used for short term saving and to provide a ready supply of liquid assets, these accounts offer very low risk to the capital value of the money invested but, the returns may not always keep pace with inflation.
To many people this is the main type of investment that they will make and although one account may look much like another the variation in return can be dramatic and costly if the wrong decision is made.
Deposit account investment has historically been made very much on the basis of locality with people opting to invest at their local Bank or Building Society. Today however, investors have a very wide range of options that are just as easily accessible with many of the best accounts being available via the Internet or by telephone only.
Bond Financial Limited can easily carry out a health check on the savings rates you are receiving and point out where a better return may be made. Maybe it’s time to check the rate you are receiving on your own savings account.
An investment trust is a public company which invests in stocks and shares of other companies which are quoted on the London Stock Exchange.
In many ways investment trusts are similar to unit trusts but there is clear difference between the two. Investment trusts invest their own share capital which consists of a fixed number of shares. A unit trust is open-ended in that the manager can issue or repurchase units depending on demand.
In the same way as unit trusts, investment trusts offer more security than the direct purchase of individual shares because the investor will benefit from a wide spread of shares and expert management, however in a general market downturn, because these funds are based on the value of shares, the values will suffer accordingly.
In the same way as unit trusts, investment trusts can specialise in different specific areas which obviously increases or decreases the relative risk or possible return accordingly.
There are many investment trusts available today and Bond Financial Limited can guide you to the best investment trust to suit your requirements.
The most common way for a company to raise funds is by the issue of shares to the general public. As well as this method of raising funds companies can issue what are known as “Loan Stock” or “Debentures”.
These issues are essentially loans to the company and differ from normal share issues in that the rate of return interest paid and the time at which the interest will be paid is determined at the issue (with normal shares the holder is reliant on a profit being achieved in order to receive a dividend).
Holders of these types of issue could expect to receive a return on their investment by way of interest even if the company does not make a profit in the period.
The difference between Loan stock and Debentures is that Debentures are normally issued with the benefit of some sort of security whereas Loan Capital is not secured. Although there is normally security with Debentures and a stated rate of interest with Loan Capital, the security of both is dependant on the existence of the company and as such there is still a degree of risk associated with this form of investment.
The interest on loan stock is paid net of lower rate tax. Higher rate taxpayers have a further liability and non-taxpayers can reclaim tax deducted.
Set up in 1969 the National Savings Office offers a range of savings plans on behalf of the government. The risk offered by these investments is very low because the government guarantee the return of any capital invested in any of the savings plans offered.
The plans offered are varied and your adviser at Bond Financial Limited can talk you through the benefits that any of these schemes offer you. In brief, the investment products available are as follows:
- National Savings Ordinary Accounts
- National Savings Investment Account
- National Savings Pensioners’ Guaranteed Income Bonds
- National Savings Income Bonds
- National Savings Capital Bonds
- National Savings Certificates
- National Savings Children’s Bonus Bond
- Individual Savings Accounts
Gilt-edged securities, more commonly known as “Gilts” represent borrowing by the British government and as such carry an excellent security (hence the term gilt-edged). Gilts are categorised normally by the length of time until maturity.
The categories are as follows :
- Short dated gilts
Issues with five years or less to run until maturity.
- Medium-dated gilts
Issues with between five and fifteen years until maturity.
- Long-dated gilts
Issues with more than fifteen years until maturity.
- Undated gilts
Issues with no set redemption date. The government may repay these at any time at their discretion.
- Index-linked Gilts
Interest payments and capital values of these issues move in line with the RPI.
Clearly because interest rates of gilts are fixed and general interest rates vary over time, the price at which the gilt is traded will change depending on the rate of interest that the issue attracts, the term remaining until redemption and prevailing interest rates at the time in the market.
Gilt-edged securities offer a high degree of security for the investor and Bond Financial Limited are able to advise on every aspect of this type of investment.
These are similar to Government stock (gilt-edged securities) in that the Local Authority issues bonds to raise money.
These sorts of investments are considered to be less secure than government stock but still carry the backing of a large body (in this case the local authority) and are issued with fixed terms and interest rates.
Minimum investments for these bonds are usually £500 or £1000.
The Individual Savings Account (ISA) is an umbrella, which shelters investments from the burden of tax. As from 6 April 2008 the mini/maxi distinction within ISAs was removed. The government will continue to allow individuals to hold these components with either the same or different providers.
Introduced in April 1999 (Investment Saving Accounts) ISAs were designed to bring a range of tax efficient savings vehicles to the public and replaced the two previous schemes known as TESSA’s and PEP’s.
The main eligibility criteria of ISAs are as follows :
- Applicants must be aged 18 or over and be resident or ordinarily resident in the UK for tax purposes.
- There are contribution limits each year that must not be exceeded.
- It is not possible to open an ISA on behalf of another person.
The maximum contribution to an ISA account can be varied each year (normally at budget time). ISAs can be based on cash deposits and shares so offering a wider range of investments for the public to choose from.
Who can invest in an ISA?
To be able to open an ISA an investor must be: 18 and over (reduced to age 16 and over from 6th April 2001 for Cash ISAs only) Resident in the UK for tax purposes.
ISA’s may only be held in the name of a single individual. ISA contracts cannot be written in trust, transferred or assigned ISAs allow you to invest in up to 2 different asset classes:
- Stocks and Shares
These make up the 2 basic investment components of an ISA.
In each tax year (based on current Inland Revenue regulations) an individual can invest into each of the two component types. You will be allowed to save in Cash and Stocks and Shares ISA, with an overall savings limit of £7200. You can have both types in the same tax year and as soon as an investment is made into one of the two types you are limited to the maximum investment limits of that component, even if you fully withdraw their investment, for the remainder of the tax year.
The annual ISA limit will go up from £7,200 to £10,200 from 6 October 2009 for those over 50 years old and for everyone else from April 2013. The cash limit in the overall allowance will rise from £3,600 to £5,100. The remainder can be invested in shares.
As far as personal taxation is concerned the income produced by an ISA and any capital gains made on the encashment are completely free of personal income tax or capital gains tax. This is the single biggest advantage of ISA investment, since the returns in the form of income or capital gain made on all shares, unit trusts or investment trusts outside of an ISA are liable to tax.
An ISA is seen as an excellent way to increase the return made on savings and medium term investment but the choice available is very wide with different companies offering a wide variety of schemes and areas to invest. Picking the right ISA to suit your needs is vital in any investment planning exercise and Bond Financial Limited are able to advise you on all the options available to you, making sure that you are aware of all the options available in this new and exciting area.
Having been popular in Europe for a number of years, this form of investment is now becoming more popular in the UK.
An Open Ended Investment Company (OEIC) is a company which invests it’s capital and shares in other investments. Features of OEICs are as follows:
- In a similar way to which a unit trust is run by a fund manager an OEIC is looked after by an authorised “Corporate Director”.
- OEIC’s are set up under company law, and not trust. A “Depositary” oversees the operation to ensure investor protection in much the same way as a unit trust trustee would act for a unit trust.
- OEIC’s are unable to borrow money to make investments.
- OEIC’s are unable to borrow money to make investments.
- OEIC’s are priced in line with the value of the assets held so, unlike investment trusts the shares will not trade at a premium or a discount.
- An Annual General Meeting of shareholders must be arranged as is required of normal companies.
- Investors may purchase redeemable participating preference shares in the OEIC. The number of shares that are issued is variable in that the authorised Corporate Director may issue more shares on demand. Because the number of shares in the OEIC may change the fund is “open-ended” in the same way as a unit trust.
- Shares are traded at a single price with no bid / offer spread. However initial charges are still made for purchases.
- Taxation on dividends from an OEIC is the same as that for unit trusts and investment trusts.
- An “umbrella fund” may be used. This means that separate companies may be used to specialise in different types of share. This offers the investor greater flexibility for their investment. By using a share exchange facility the investors are able to switch funds if required.
Many of us are familiar with the purchase of shares in quoted companies. It is important to remember that these shares essentially represent loans made to the companies involved to fund their activities or expansion.
Very careful consideration must be given before any investment in shares is made since the risks involved can be substantial. The return on this form of investment can be either from any dividends received from the profits of the company or from the increase in the capital value of the share in the market. It is important to note that the value of these sorts of investment can fall as well as rise and as such a capital loss can be made.
There are three main types of shares issued:
The most common form of share and the best known to the general public. Return is derived from dividends and any increase in the capital value of the share upon sale.
Representing part of the share capital of a company, this type of share ranks ahead of an ordinary share in respect of dividend payment and on the winding-up of the company. There are various types of preference share, the most common being being cumulative, redeemable and convertible.
Warrants give the holder the right to subscribe for a given number of shares in the issuing company at some stage in the future. There is not normally the right to receive any dividends and the only right is to subscribe for shares at some stage in the future. The hope is clearly that the share price will rise so making the price at which the warrant is issued attractive enough to justify the purchase. If the share price falls and the shares are not worth buying at the price determined by the warrant then the warrant itself is worthless.
Share ownership is becoming more and more common these days but it is important to have a clear understanding of the risks involved before making any investment decision. Shares can certainly be classed as a high-risk investment since the potential return can be substantial but the potential for significant (or even total) loss is also very possible.
A unit trust can be termed as a collective investment company.
Money invested into the trust is used to buy shares and other investments. Investments in the fund go towards buying units which represent a fraction of the total value of the fund.
Because of the trust nature of the investments the unit manager is obliged to buy back the units from investors at any time although the value of these units will depend on the value of the trust as a whole and therefore the individual units at that time.
In the same way as investment trusts, unit trusts can be chosen that invest in specific areas that may aim to produce, for instance, capital growth, income or both. Some funds specialise in investing in overseas areas where the perceived risk is greater (in some areas of the world) while others specialise in the purchase of only “blue chip” stocks.
It is important to note that, in the same way as shares, unit trusts operate a bid and offer price system. In simple terms this means that at any given price, you will pay slightly more to purchase (offer price) and you will receive slightly less (bid price) if you wish to sell.
The unit trust manager who is responsible for managing the fund and valuing the assets held will derive his / her profit from the fees charged and profit made from dealing in the units in issue. Control of the trust assets and approval of advertising for the fund is controlled by the trustees who also ensure that the Manager complies with the terms of the trust deed.
Investment into a unit trust can be made either by a lump sum investment or by monthly investment, usually by a standing order or direct debit. Many people select to invest on a regular basis rather than with a lump sum in order to smooth out any sudden movements in the price of the units, which is often reflected by sudden changes in the value of equities. This type of benefit is called “pound cost averaging”.
The important points for potential investors to be aware of are that income from dividends or capital gains in the fund are treated in the same way as the same type of income from shares. (See current taxation levels for more details of current thresholds).
Unit trusts have become very popular over the years and offer a wide variety of sectors to invest in. With the option of either lump sum investments or monthly contributions this type of investment has come within the reach of even the most modest sums of investment capital.