Investments and Planning for the Future

Cash deposits are provided by banks and building societies. Capital should be secure and interest earned on the account. The accounts would normally provide instant access to cash, although some may offer higher interest rates for accounts that require notice of withdrawal or apply penalties when capital is withdrawn.

Current accounts normally pay little or no interest and high street bank or building society branches offer modest rates of interest on deposit accounts. The best rates are typically offered by accounts that operate either by telephone or on the internet.

There are a number of schemes that offer a secure means of saving but returns may be disappointing. For example, the Investment Account is similar to those provided by banks and building societies. Whilst the interest rate offered is competitive with high street bank or building society accounts it does not compare favourably with rates available on the telephone or internet accounts. Equally, Income Bonds provide a monthly income savings option but offer an interest rate that is below rates available on instant access telephone or interest accounts offered by the banks or building societies.

Capital secure growth options are available with Savings Certificates or Index Linked Certificates but returns are likely to be modest unless there is a period of high inflation in the economy.

When the government wishes to borrow money it issues stock on which it guarantees to pay a fixed rate of interest and guarantees to repay the face value of the stock at a set maturity date. Gilts, as government stock is commonly known, make a very secure investment if purchased at issue and retained until maturity but they are also widely traded through stockbrokers or bank share dealing services. The Government’s Debt Management Office also offers a Gilt Purchase and Sale Service. Some managed funds also include gilts.

Gilts can prove an attractive option if purchased at a time when interest rates are likely to fall as they will continue to pay a higher rate of interest than may become available from a variable rate investment, and are likely to increase in value. However, care should be exercised in purchasing gilts if interest rates are at relatively low levels as this could result in a capital loss, even if held to maturity.

Corporate bonds are very similar to gilts but are issued by large companies and, as the company could default on its obligations, carry a higher degree of risk than government stock. In return for the higher level of risk they usually offer a higher level of interest and are classified by the degree of risk as identified by the major credit rating agencies. It can generally be assumed that the greater the interest rate the greater the risk.

From time to time insurance companies may issue short-term policies on which they offer a fixed level of income and guarantee to repay the capital at a set period, varying between one and five years. This is a very secure option and could provide an attractive option for cash that is not required for a longer period, depending upon market conditions at the time the investment is placed.

Managers of unit trusts pool money together from a broad range of investors and invest it in a managed portfolio of shares, either on the United Kingdom stock market or any other international market. This makes it possible for the private investor to obtain a globally diversified investment portfolio whilst also reducing risk compared to holding direct investments in a small number of individual companies.

However the investor should always be aware that the value of the units could fall as well as rise in response to stock market movements and, although units can be sold at any time, they may need to retain the investment during periods of depressed market conditions. As the level of risk associated with individual funds can vary substantially it is important to choose funds compatible with an investor’s personal attitude to risk.

The managers of investment trusts also manage a diversified portfolio of shares but unlike unit trusts, where the underlying investments are held in trust for the investors and the unit price reflects the value of the portfolio divided by the number of units in issue, the Investment Trust issues a fixed number of shares in the company and those shares are traded on the stock market. The shares can, therefore, trade at either a discount or a premium to the value of the underlying investments. It is also possible for the investment trust to issue different classes of shares so they should be regarded as more complex investments that carry a higher degree of risk compared to unit trusts.

Insurance companies offer investment bonds that can be linked to funds invested in equities, fixed interest funds, property funds, or with-profit funds. They also offer a high degree of income flexibility in that it is possible to withdraw a monthly income at a level determined by each investor. This can be a very attractive feature provided care is taken to ensure that income withdrawn is no greater than the returns generated by the fund. They can also be useful for tax planning as it is possible for the higher rate taxpayer to withdraw 5% income for up to 20 years with no personal liability.

As part of its policy of encouraging savings, the government introduced Individual Savings Accounts (ISA’s), which enable investors to receive their interest or capital growth returns completely free of tax. Such concessions always have limits and these were set at £20,000 as of April 2017.

ISA’s have the flexibility to use the allowance however you wish:

• You can invest wholly in stocks and shares, or completely in cash, or any combination of the two without the requirement of a fixed amount in either.
• An ISA can hold a wide investment range and apart from Stocks & Shares and cash.
• You can contribute to one cash ISA and one Stock & Shares ISA (up to the overall maximum) each tax year, and may transfer between each of them an unlimited number of times within that tax year.
• ISA’s can now be transferred between spouses on death.