Savings & Investments
Saving is a secure way to accumulate money, providing limited growth but low risk. It’s ideal for risk-averse individuals, ensuring funds for purchases or emergencies. While saving involves minimal risk, investing offers potentially greater returns but with increased risk.
Often, people save for a specific reason and it’s usually the safest way to build up a pot of money.
It’s less risky than investing, but it offers limited growth. The most you’ll earn on the money you save is the interest added. Saving is perfect for people who don’t want to take any risks with their money, and most savings accounts have easy access or are for a fixed term.
There are many different ways to save, but whichever way you choose, the general idea is the same: to build up some money – savings – that can be used, for example, to make a large purchase such as a new fridge, go on holiday, pay for school fees or cover the cost of expensive times like Christmas.
Savings also provide security by making sure that some money is put aside for emergencies or unexpected costs.
Introduction
Where Can I Put My Money?
There are a number of different types of savings products out there. The links in this section will provide a guide to what is available to you.
What’s The Difference Between Saving And Investing?
Saving is a stage on the way to investing.
You cannot be an investor without being a saver – but you can be a saver without being an investor.
When someone talks about savings and saving money, it could be referring to a piggy bank on the mantelpiece or a high interest deposit account. Savings are effectively cash or cash instruments, such as deposit accounts or term bonds.
Investing is what you can do with the savings you have created – if you are looking to generate a return on your money that is greater than what is already available to you through your savings instruments.
As a saver, you will be taking very few and very small risks with your money.
As an investor you are taking a much greater risk. Not only is the return on offer to you likely not to be fixed or guaranteed, the capital sum you invest is at risk as well.
So why would anyone want to take such risks? The short answer, of course, is because the potential rewards may be greater and you want to generate more from your money than is possible by simply leaving it in a bank or building society deposit account.
What Should I Do Now?
Since there are so many different types of savings and investments, and there are potential risks with investments in particular, it is wise to seek expert advice which can be tailored to suit your own circumstances.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
Capital Investment Bonds
Fixed interest investments is the term used to describe Government and Corporate bonds (which should not be confused with ‘investment bonds’ which are a kind of life insurance policy).
These kinds of bonds are loans to governments or companies that guarantee to pay the bondholder a specified level of income (called the ‘coupon’) for a specified period of time. At the end of that time the bond issuer will repay the capital loaned.
Role in investing
Fixed Interest securities are important in diversified investments and investment strategies by:
- Providing a reliable income stream and liquidity
- Providing an element of capital security
The risk of fixed interest investments is that the bond issuer defaults on either the interest payments, or the repayment of capital. Historically speaking fixed interest investments have not provided the same levels of return as equity investments, but the risk to an investor’s capital is generally lower.
As a rule of thumb the rate of interest offered increases with the risk of the issuer defaulting.
Generally speaking, fixed interest investments are divided into 3 groups:
Government Bonds
Most governments issue bonds. UK government bonds are called Gilt Edged Stock or “Gilts” and are considered to be some of the lowest risk investments. Generally speaking bonds issued by governments represent a lower risk than bonds issued by companies. Consequently the interest paid by governments tends to be lower than that paid by companies. It must be remembered that one needs to consider the individual government issuing the bonds, as some governments have defaulted on these types of securities or are at risk of defaulting.
Investment Grade Corporate Bonds
These are bonds issued by companies with good financial strength and credit ratings. While generally considered to be riskier than Gilts, they are still low risk compared to investing in equities or commercial property. The rate of interest on these kinds of bonds will normally be higher than that paid on Gilts, but lower than that paid on ‘Sub-Investment Grade Bonds‘.
It should be noted that ‘Investment grade bonds’ can become ‘sub-investment grade bonds’ – at the time of issue the company may have been understood to be on a firm footing but during the term of the bond they may lose their credit.
Sub-Investment Grade Bonds
These are also known as ‘High-Yield Bonds’ or even ‘Junk Bonds’.
These bonds are higher risk than Gilts or Investment grade bonds, and tend to pay greater rates of interest. They will normally be slightly lower risk than equities, but will normally be used to provide opportunities for growth and income in a portfolio rather than to provide some capital security.
The amount of risk will depend on the individual company issuing the bond. Companies that are considered to be a greater risk of default, need to pay a greater rate of interest to attract people willing to lend them money, thus the rule of thumb that the greater the risk of default, the greater the rate of interest, or ‘yield’ (and vice versa). This gives rise to the common terms of ‘high-yield bonds’.
The term ‘junk bonds’ can be used to describe any ‘sub-investment bond’, but is most commonly reserved for bonds of those companies who are already, or are in imminent danger of, defaulting or having to restructure the company and/or debt.
All fixed interest securities can be traded on stock markets. They may be sold on these markets at a value that differs from the issuers value. If an issue of bonds has become more attractive (e.g. the company’s fortunes have improved and/or the rest of the market is considered to be riskier than before) then you may be able to sell the bonds for more than their face value. Alternatively, if the issuer has become less attractive (e.g. the issuer is in financial difficulties) then the value of the bond would be less than the face value (assuming a buyer can be found).
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
Offshore Collectives
Investing in Offshore Collective Funds
Offshore investment vehicles include unit trusts, mutual funds or investment companies. The offshore company will normally be situated in a country where the investment fund pays little or no tax on its income or gains. While this does allow the investor some benefit while invested, if the proceeds are brought back to the UK they will be taxed at that point.
Risk & Reward
As with any other investment the risks and rewards will be dictated by the investment strategy and decisions of the investment managers. However, it should be borne in mind that many offshore investments do not benefit from the legislative and regulatory protections that UK authorised investments have.
Financial Conduct Authority Recognised Funds
These are funds which, although managed overseas, are permitted to market themselves directly to UK private investors. For an investment to be ‘recognised’ it will either be an investment authorised by another regulator within the EEA, or it will have provided information to satisfy the Financial Conduct Authority (FCA) that it provides ‘adequate protection’ to investors and is appropriately managed. However investors in such schemes will not benefit from access to UK customer protection schemes such as the Financial Services Compensation Scheme.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Offshore collectives are complex investments and are not suitable for everyone, you should seek financial advice before entering into this type of investment.
Junior ISAs
Individual Savings Accounts for children or Junior ISAs were introduced in November 2011 replacing Child Trust Funds. They are long term, tax-free savings accounts for children who:
- are under 18
- live in the UK
- have not invested in a Child Trust Fund account.
If your child lives outside the UK they can only open a Junior ISA if you are a Crown servant (for example, you work in the UK’s armed forces, diplomatic service or overseas civil service) and the child depends on you for care.
A child cannot have a Junior ISA as well as a Child Trust Fund account, however, a Junior ISA can be opened and the trust fund transferred into it.
There are two types of Junior ISA, a cash Junior ISA and a stocks and shares Junior ISA and a child can have one or both types at any one time but the total annual amount which can be paid into either or both combined (if they have both) is £9,000 (tax year 2023/24).
If the child is under 16 the account must be opened by someone with parental responsibility, e.g. a parent or step-parent, who then becomes the ‘registered contact’ and the only one who can change the account or provider. They should also keep all paperwork and report on any change of circumstances.
Anyone can put money into the account (providing the annual limit is not exceeded) but only the child can take it out and only then when they are 18. If they choose not to take it out or invest it in a different type of account then the Junior ISA will automatically become an adult ISA.
The money in the account can only be withdrawn before the child is 18 under two conditions:-
- The child is terminally ill, in which case the ‘registered contact’ can take the money out
- The child dies, in which case the money will be paid to the person who inherits the child’s estate.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
National Savings Products
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 spectacular and some involve tying your money up for long periods of time they are nevertheless stable and in some cases can be paid tax free.
They include National Savings Bank accounts and various forms of savings and Income Bonds. These savings and investment products are backed by H.M. Treasury, which makes them the most secure cash products available in the UK.
The financial conduct authority does not regulate on national savings products.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
Endowments
Endowment Policies
These are life insurance policies that are designed to pay a lump sum after a specific term, and pay out a guaranteed sum if the person insured dies within the term of the plan.
Although it is still possible to buy endowments that guarantee the value of the lump sum at maturity, the majority of policies do not guarantee the maturity value – the money that you get back will depend on the value of the investments within the policy.
By using life insurance policies, the value of the plan at maturity can be paid without paying any further tax if certain ‘qualifying conditions’ are met. Although the policy holder can avoid paying any tax at maturity, the insurance company does pay tax on income and gains within the policy.
These policies can be particularly useful if you have an investment objective you’d like to realise regardless of what happens to you, for example to repay a mortgage; provide a legacy for your children; provide for university fees etc.
However, the policy charges and the cost of the life insurance means that it can take several years before the endowment’s value is greater than the contributions paid in. Also, there are other, more tax efficient and less expensive investment options available, so if you do not have any need to guarantee a sum will be paid if you die, an endowment is unlikely to be the most suitable option for you.
As with most investment the value of an endowment depends on investment performance and is not guaranteed.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
ISAs
Individual Savings Account (ISA)
ISAs represent a tax-efficient container in which to place cash savings and investments in equities, bonds and collectives.
An ISA is available to all UK resident individuals and to Crown servants (for example, those in the UK’s armed forces, diplomatic service or overseas civil service) and their spouses or civil partners who are not resident in the UK.
To open an ISA you must be over the age of 16 for cash ISAs & over the age of 18 for stocks and shares ISAs and you cannot hold an ISA with or on behalf of someone else.
Designed to encourage new saving they are attractive to investors seeking a tax-efficient investment vehicle with the potential for higher returns. There is usually a low level of minimum subscription and no minimum period of investment.
An ISA enables you to accumulate savings in a tax efficient manner as all gains in the hands of investors are free from tax, making them particularly attractive to higher rate taxpayers.
An ISA can contain cash deposits, investments in equities, bonds and collectives.
For the 2023/24 tax year, you can choose to pay in one of the following:
- £20,000 to a cash ISA and nothing to a stocks & shares ISA.
- £20,000 to a stocks and shares ISA and nothing to a cash ISA.
- A combination of amounts between a cash and a stocks & shares ISA, up to the overall annual limit of £20,000.
You can only open one cash ISA and one stocks and shares ISA to put new money into each tax year. But you can also open other ISAs to transfer old ISAs into.
Withdrawals from an ISA can be made at any time with all gains free from tax but it is only possible to hold one ISA per tax year, so if an ISA is closed within the same tax year that it was opened, another one cannot be started until the next tax year.
ISAs can be transferred from one provider to another, as long as the new provider accepts transfers. This is often done with a cash ISA after it has been held for a year as previously attractive interest rates drop dramatically when short-term bonuses and fixed terms come to an end. The transfer is initiated through the new, receiving, provider who will require you to supply details of the original account and will manage the whole transfer process. Transfers should not be done manually by withdrawing the investment, closing the account, and re-investing it in the new account, as this removes the tax-free interest status of your investment.
The current year’s allowance is unaffected by anything transferred from previous years so you can transfer previous investment to a new ISA and open a second ISA for new contributions if you wish, as long as you don’t contribute to both.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Investors do not pay any personal tax on income or gains, but isas do pay unrecoverable tax on income from stocks and shares received by the isa managers.
Tax treatment varies according to individual circumstances and is subject to change.
Equities
Investing in equities means buying stocks and shares in companies listed on the stock exchange. Historically this brings greater rewards than investing in bank accounts and bonds as 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.
But with these increased rewards comes greater risk as 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.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
Collectives
Collective Investments
With a collective investment your money is pooled, along with that of other investors, to create a large capital sum. Professional fund managers then use this capital sum to build up a large portfolio of investments. This approach enables you, indirectly, to hold a wide range of stocks and shares or other investments in a way which would not be practical for the majority of individual investors, whilst reducing the effects on your capital of fluctuations in individual share values.
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. However 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.
With a collective investment your capital can benefit from expert full time investment management, reducing the risk and complexities of direct investment into equities. Your money becomes part of a much larger investment portfolio with much larger individual investments, as well as more individual holdings.
Not all the money in collective investments will be invested. The managers will normally hold a small amount of capital in cash to help pay for costs and to provide money for investors who want to sell units in the investment. In circumstances where there has been a reduction in fund values and/or the funds receive a large number of requests, fund managers may delay or postpone withdrawals to avoid having to sell investments and undervalue. This can be of particular importance to investments that invest in illiquid or difficult to sell assets, e.g. commercial property.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
Unit Trusts
Investing in Unit Trusts
Unit Trusts are a common type of collective investment.
A unit trust is a large fund of monies and/or investments pooled together and controlled by trustees with the aim of gaining capital appreciation, income, or both.
Unit Trusts are made up of ‘units’. Each unit will have both a buying price and a selling price. The difference in these prices includes the fund management charges. The number of units held, multiplied by the current price, gives the current value of an investor’s holding.
These investments are open ended, which means that units are created every time an investor puts money into the fund, and liquidated when they withdraw money, so that the fund can react to demand and continually grow through prosperous periods.
Investors can then enjoy the benefits of larger investments, however during periods of poorer performance, the fund may need to sell assets to enable investors to withdraw their monies, so the fund size is reduced.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
OEICs
Open Ended Investment Companies (OEICs)
An OEIC works in a very similar way to a unit trust except that an OEIC is legally constituted as a limited company (Plc). OEICs have been operating outside the UK for some time, but only since 1997 has it been possible to operate an OEIC in the UK.
OEICs are not trusts and do not therefore have a trustee. Instead, however, they have a depository which holds the securities and has similar duties to a unit trust trustee.
Most OEICs operate as umbrella funds which means that the OEIC is authorised and then can set up sub-funds without gaining individual authorisation for individual sub-funds. Each sub-fund has different investment aims, e.g. a sub-fund may specialise in the shares of small companies or in a particular country, e.g. the USA. Each sub-fund can also have different charges and minimum and maximum investments. Unit trusts are allowed to do this too, but few do.
Most OEICs only have one unit price and the initial charge is added as an extra. Unit trusts always have two prices, the lower or bid price is what you get when you sell back to the managers; the higher or offer price is what you have to pay when you buy.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
For further advice on savings and investments from experts that specialise in dealing with all aspects of wealth management, please contact us through our confidential online enquiry form or telephone 01327 317388
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