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 and collectives (see below).

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.

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.

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.

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 this type of 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. There is also a risk that the investor may not get back the full amount they have invested.

To safeguard the funds' strength, Market Value Adjusters (MVAs) are imposed on savers who wish to withdraw their money early. MVAs generally take the form of a charge levied on investors who withdraw some, or all, of their money from a with-profits policy before the policy has reached the end of its term. MVAs are applied as a percentage of the amount that the investor withdraws. So, for example, if a firm decides to make a 15% MVA, then when an investor cashes in an investment worth £10,000, the investor will receive £8,500. The percentange depends on when you invested, whether markets had many ‘up’ periods during that time, and whether bonuses were rampant within the fund for any period.

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 your risk and reward profile.