Investment.
This section is about various ways to invest a lump sum of money. It currenty looks at traditional building society deposit accounts, TESSAs, unit trusts, PEPs and ISAs.
In time, I hope to expand it fully to include National Savings, Bonds, Gilts, Annuities etc as well as a brief section on non-traditional ways of investment and on share buying.
If you just want to jump straight to the section you are interested in, then feel free. Each section has a link back to here.
Brief introduction to investment
Some questions to ask yourself ...
This is one of the most fundamental questions you need to ask yourself ......
..... what do I want my money to do ?
Investing usually occurs when someone has more money than they need for the time being and can afford to put it away for a while. Normally, this will either be with the objective of making more money (ie. Growth of the capital) or for the purpose of generating an income. Most of the investments covered in this section provide the chance for your capital to grow, although some can be used to provide a regular income as well / instead.
Apart from "as much as possible", is there a particular sum of money that you "must" have back at a given time in the future. For instance, are you investing the money so that you will be able to pay for University fees in 5 year's time, or is it for a car / holiday etc.
If there is no fixed amount required (and this is quite often the case) then what sort of returns are you looking for ?
One of the starting points ought to be to invest so that the investment provides a greater return than the rate of inflation. Without this, the value of your money in terms of what it will actually buy you, will decrease as the years go on.
Inflation is one of the biggest enemies in investment, and one that you need to defeat.
There is an equation used in some branches of economics that shows the return on an investment being directly related to the length of time that the money is invested. This is a way of "compensating" the investor for not being able to use the money whilst it is tied up.
In a day-to-day way, we see this in a normal bank or building society account; a current account with cheque-book etc. pays little or no interest on a credit balance, whilst a 90-day notice account will pay much more.
Many investments are only really suitable if you can afford to leave the money alone for a period of more than 5 years. Sometimes it is possible to gain access to the money before then, but it would be normal to have to pay a penalty for this.
For this reason, a professional adviser will ask you to consider the following question ...
In case of an emergency, will you need to get hold of this money, or will you have other funds you can draw on.
Are there things likely to crop up in the next few years that you will need to use the money on - a new car, double glazing etc.
Take a look at your latest statement. What rate of interest are you paying ?
Is it likely that you will be able to earn a greater rate of interest than this by investing the money ?
As an example, credit card & store card rates of interest are often above 20% per year - few investments are likely to pay that sort of return.
At the time of writing, a mortgage however, may have a rate of say 6.95% - even lower in cases of special fixed rate deals / discounts. With tax relief taken into account, the first £30,000 of a mortgage may only be charging about 6.25%. In this case, it may well be worth investing the money rather than paying off the loan.
Some people may prefer to pay off a mortgage and then save the money that they were spending. However, once it has been used in this way, remember that it is gone, and can't be drawn on in future to cover any unexpected situations.
Many books or guides on this subject talk about an investment "pyramid". This is a way of illustrating the degree of risk attached to different types of investments.
In a nutshell, the more "safe" an investment, the less likely it is that you will lose your original stake money. However, the higher the risk, the higher the potential returns.
It would be usual for an adviser to recommend building a portfolio for you. This would be tailored so that a spread of different investments, with different degrees of access, risk and reward was set up so that it matched your own preferences and aims.
See the "Why use a financial adviser" page for more details.
Check whether an investment is tax free, paid net of tax or paid gross.
Tax Free is exactly what it says. Individuals (different rules apply to companies, trustees and corporate bodies & this site is not aimed at these) regardless of their own tax status need pay no tax on the income / dividends / profits generated.
Paid Net is the situation with many investments such as a Building Society account. Tax is deducted automatically from any interest earned in such a way that Basic-rate taxpayers would ususally need to pay no more tax. Lower-rate and Non- taxpayers may be able to reclaim some or all of the tax deducted upon application to the Tax Office. Higher-rate taxpayers are likely to pay more tax on the interest earned. This often is paid through an adjustment to their next years tax coding although it is usually possible to just pay the money direct to the Inland Revenue after completing an annual tax return.
Paid Gross is when the interest is paid without the deduction of tax. Those who are liable to pay tax then need to declare these earnings; non-taxpayers do not. Most Building Society/Bank accountss will be able to pay interest "gross" if asked to, and upon receipt of a completed Inland Revenue declaration which they can provide (form R85).
Special rules apply to investments made on behalf of children. In basic terms, if it is a parent who gives the money to a child which then earns interest of more than £100 per year, then the investment is deemed to be a tax dodge by the parent and thus it is taxed as part of the parent's income. If, on the other hand, it is a grandparent, uncle, aunt etc. who has provided the money (for instance as birthday presents) then any income earned can be offset against the child's own tax allowance which is the same as a normal adults. This means in most cases that no tax will be payable.
Now jump to the area that interests you the most.