Savings and Investments
If you are in the fortunate position of having a lump sum, or a regular or occasional excess of income over expenditure, you may wish to consider how best to save or invest it. How you do so will depend on a large number of factors, including whether you wish to derive an income from the investment or whether you wish the capital of the investment to grow, how long you expect to keep the money invested, your tax position etc.
If you require access to funds at short notice, savings accounts at banks or building societies may be appropriate. There your capital is "risk free" but rates of interest may be relatively modest. If you are investing for the long term, however, and are prepared to accept the risk that the value of investments may go down as well as up, in return for the prospect of higher growth in the medium or long term, lots of investment options are open to you. Certain individuals may wish to invest directly in the stockmarket, but for those who wish somewhat less risky investments and to enjoy tax benefits available, we are able to advise on:
Unit Trusts
The big mistake that people make is to treat money for investing just like money for saving. Deposit based accounts are fine for short term saving needs, but they simply cannot generate enough wealth to cope with major long-term requirements.
The trouble is that stock market investment is a risky business. If you pick the wrong stock you could lose a lot of money. If you are really unlucky you could lose everything. That is why all investors should spread their investment across a range of stocks and shares. This range is often called a portfolio.
However, to achieve an adequate spread requires a lot of money. This puts direct stock market investment beyond the reach of most people. That is where unit trusts come in.
Unit trusts are collective investment schemes that enable investors to pool their money in a fund run by professional investment managers. They were developed in the 1930s to provide big investor benefits to smaller investors.
By dividing the investment across a broad range of stocks and shares, the managers help to spread the risk and ensure that investment objectives are met. The total investment fund is divided into units and as the value of the underlying securities rises and falls so does the value of each unit.
Individual Savings Accounts (ISAs)
An ISA (Individual savings account) is an individual allowance that enables you to save up to the annual ISA limit, free from income and capital gains tax, maximising the interest you earn on your investment. ISAs were introduced as a replacement for PEPs and TESSAs in 1999 and are likely to run in their current form, indefinitely.
ISA Boost for those aged 50 and over
The current overall ISA limit is £7,200 and up to £3,600 of this amount in cash with the remainder being invested in stocks and shares. This overall limit will rise to £10,200 from April 2010 and at that time will allow up to £5,100 cash.
An incentive for older savers announced by the Chancellor in 2009 budget allows people aged 50 or over to invest the higher limit starting from 6th October this year (2009).
So, who actually qualifies and when?
The Revenue & Customs announced that all those whose 50th birthday falls between 6th October 2009 and 5th April 2010 will be permitted the higher allowance from 6th October 2009.
Once you have invested money in an ISA it gains its tax-free status immediately and does not lose this benefit once you decide to withdraw it. However, once you have paid in your full allowance during a tax year you are not able to invest anything further under your ISA 'wrapper', even if you have made withdrawals.
Investment Trusts & Open-ended Investment Companies (OEICs)
Investment Trusts and OEICs (pronounced "oiks") are collective investments that have different legal forms Unit Trusts but which have similar objectives. You invest in shares in companies set up as a vehicle to re-invest their shareholders funds in a portfolio of other shares and other investments, again with the intention of providing a risk/reward profile to match investors' aims.
Insurance Company Capital Investment Bonds
A capital investment bond is a unit-linked policy. This means that the bondholder can link the benefits of the bond to one or more of a number of investment funds. The initial capital sum and any further sums are invested in units of the chosen fund (or funds). Prices are calculated each day and the value of the bond at any time will depend on the value of these units. These funds can range from low risk to medium or high risk depending on the individual's attitude to risk. There is also a with-profits fund which grows at a guaranteed rate and provides certain capital guarantees which other funds do not.
After the initial choice of funds has been made the bondholder may later wish to change these fund links. This can be done at any time without incurring liability to capitals gains tax and if further capital sums are invested in the bond they need not be linked to the same funds as the initial investment. The insurance company normally applies charges to manage the investment funds. An initial charge, which covers the costs involved in setting up the bond, is deducted in the form of a 5% spread between the bid and offer prices of a unit. Fund charges cover the cost of managing the investment. If the plan is unit linked the value of units can fall as well as rise.
Risk Warning: The value of investments and any income derived from them can fall as well as rise and the future of any investment cannot be guaranteed.
© 2009 Peterkins Solicitors Aberdeen, Inverurie, Huntly, Keith and Alford