Investments (ISAs/Bonds)
You work hard for your money, and you want it to work hard for you. A wide range of savings options are available – some may give you more, by risking more, while others can provide you with a safer, lower return. There isn’t a simple answer – and you don’t have to pick just one.
A financial advisor can guide you through the maze, helping you to work out the best option for you.
Regular Investment Expected Returns per year
10Yrs at 7%/yr 10Yrs at 4%/yr Amount Invested
£100/Mth – £16,274 £100/Mth - £13,956 £12,000
£200/Mth – £32,547 £200/Mth - £27,912 £24,000
£300/Mth – £48,821 £300/Mth - £41,868 £36,000
£400/Mth – £65,095 £400/Mth - £55,824 £48,000
£500/Mth – £81,369 £500/Mth - £69,781 £60,000
£1,000/Mth – £162,739 £1,000/Mth – £139,562 £120,000
20Yrs at 7%/yr 20Yrs at 4%/yr Amount Invested
£100/Mth - £45,248 £100/Mth – £32,654 £24,000
£200/Mth – £90,497 £200/Mth – £65,308 £48,000
£300/Mth – £135,746 £300/Mth – £97,962 £72,000
£400/Mth – £180,994 £400/Mth – £130,616 £96,000
£500/Mth – £226,243 £500/Mth – £163,270 £120,000
£1,000/Mth – £452,487 £1000/Mth – £326,540 £240,000
30Yrs at 7%/yr 30Yrss at 4%/yr Amount Invested
£100/mth – £96,836 £100/mth – £57,704 £36,000
£200/Mth – £193,672 £200/Mth – £115,408 £72,000
£300/Mth – £290,509 £300/Mth – £173,113 £108,000
£400/Mth – £387,345 £400/Mth – £230,817 £144,000
£500/Mth – £484,182 £500/Mth – £288,521 £180,000
£1,000/Mth – £968,364 £1,000/Mth – £577,043 £360,000
“Why am I investing?”
Generally you should first and foremost have an emergency fund in cash, there is no set amount for an emergency fund, some people will be happy with £1,000, others may want £100,000 in cash. If you have a satisfactory level of money in cash then you should consider what your attitude to risk will allow you to do in terms of investing.
Are you willing to accept some risk to your capital?.
Is security important for all or for some of your money?
If you cannot bear the thought of the possibility of losing money, you may need to consider products or funds that can protect all or part of your capital.
Can you make a long term commitment?
An investment should be considered a medium to long-term commitment of no less than five years, ideally more.
What are your aims?
Are you investing for a specific purpose such as moving home, paying for your children’s university fees, a holiday of a lifetime, a wedding or your retirement?
For Growth or to provide an income?
How long do you plan to invest?
What is your attitude to risk?
Are you willing to accept more capital risk in return for greater growth potential?
Are you comfortable with the potential ups and downs of the market that could see the value of your investment fluctuate from week to week and month to month?
Is inheritance tax something you need to think about?
Most deposit accounts offer some capital security & usually give you easy access to your money too.
Investments are different. There is usually a risk that you could lose money and many investments ask that you commit your money for at least five years and often much longer.
So why become an investor?
That’s simple…….for the potential returns.
Deposit accounts are very good at what they’re designed for – taking care of short term financial needs, ie spending and saving.
What they cannot offer however, is the potential for long-term growth. The principal attraction of investing has always been that it offers the potential to achieve greater long-term returns than bank and building society accounts. That’s why, many people. who really want to make the most of their money, invest it.
Most people think of investing in terms of buying shares in a company. In fact, this is just one type of investment. There are four main categories of investment or ‘asset class’, as described below.
Equities
Shares also known as ‘equities’ buy you a small part of a company. This entitles you to a share of any profits the company makes. If the company is seen to be successful their shares may be wanted, pushing up the share price but share prices also fall.
• Share values can be highly volatile in the short term but can offer long-term growth potential
• You can buy shares in the UK, Europe, USA in fact almost anywhere in the world.
• There is no set maturity date but equities are mainly suitable for medium to long-term investments of at least five years & preferably longer.
• There may also be an additional benefit of dividend (income) payments, the value of which may also fluctuate
• The value of equities is not guaranteed and may fall as well as rise which could mean you losing some or all of your money
Fixed Interest Securities/bonds
Fixed interest securities are more commonly known as ‘bonds’. Bonds are basically loans – a promise to pay back your original investment at a set date in the future, plus regular payments during that period.
Bonds can be Corporate Bonds, issued by Companies to raise money, or Government Bonds. UK Government Bonds are also referred to as Gilts.
Returns can come in two ways.
Income is provided by the payments (interest) that the issuer pays until the issuer pays back the loan.
Like equities, bonds can be traded so you may also be able to achieve capital growth by selling a bond during its lifetime for more than you bought it for.
• Bonds are particularly suited to providing an income
• Bonds are a fixed term investment – they end on a pre-agreed date in the future
• Bonds often provide more modest returns than equities but tend to be less volatile over the short to medium term.
• The value of fixed interest securities/bonds is not guaranteed and may fall as well as rise which could mean you losing some or all of your money
Property
In investment terms, property means commercial property such as offices, shops, warehouses, factories, leisure facilities and other business buildings.
Returns from commercial property can come in two ways:
from rent paid by tenants and from increases in the market value of the property itself.
• Property can offer good prospects for long term capital growth
• Rental agreements produce a steady income stream
• Property values do not always mirror stock market values which can be advantageous when stock market values are falling
• Property can be difficult or take time to sell, so you cannot always trade when you want.
• The value of commercial property is not guaranteed and may fall as well as rise which could mean you losing some or all of your money
Cash
Although the returns from cash are generally lower than other asset classes over the long-term, it has a number of useful attributes.
• Cash can offer capital security like bank and building society accounts
• Cash can at least produce some returns when stock markets are falling although potential returns are limited
• Cash adds flexibility and stability to funds that invest in other assets
Investment in the stock market is widely believed to provide better growth potential than other asset classes over the long term, ten years or more. When stock markets are perceived to be low investors generally see this as an opportunity because it means future growth potential is high.
History shows that stock market performance has followed a cycle – downward trends have eventually given way to upward trends, although you should bear in mind that past performance may not be repeated.
Diversification can reduce the chance that a single poor performer will jeopardise the value of your capital or income stream. If one investment does badly, there is the possibility that another will do well to make up the loss.
Investing in more than one fund across different asset classes can reduce risk for example, as well as equities, you could invest in commercial property, cash and fixed interest securities too. So if the value of your equities fall, one of the other asset classes might be able to compensate, or vice versa.
Tax
Investing can help you save tax, especially if you have large amounts of money held on deposit in bank and building society accounts.
ISAs enable you to invest free of any personal liability to income tax or capital gains tax although the dividend income is taxed.
Other investments can help you reduce your inheritance tax liability so that when the time comes, you can pass on more of your money to your family and less to the tax man.
Onshore bonds can be used to draw an income in a tax efficient manner and are often used in conjunction with trusts for control of assets & tax planning.
Offshore bonds taxation is governed by the tax regime of the territory where the life office is established. Hence most of these offices are set up in places where the income & capital gains in non resident funds are not locally taxed. This is often referred to as “gross roll up”. Dividend and other income which the life office receives may be subject to non recoverable withholding tax, but this can be minimised by investing for growth rather than income. When the bond is finally encashed and brought back to the UK the investor will pay income tax (rather than Capital Gains Tax) at their highest rate. Higher charges can negate the advantage of Gross Roll Up. But if, on encashment, the bond owner is in a lower rate tax band, than in earlier years, there may be considerable advantage.
Interest rates
UK interest rates have been falling steadily since the early 90s, and in early 2009 after the Bank of England took action to stem the effects of the credit crunch, rates hit their lowest ever point. Good news for the borrowers, not so good for savers.
If you have substantial savings, these rates will have an impact on the annual earnings you’ll get from the interest on these savings, and remember, it’s also taxed.
Inflation
Even if you don’t spend a penny of your savings, the effects of inflation actually causes the purchasing power of the money you hold on deposit to diminish over time because if inflation rates are higher than savings rates, after tax has been taken into account, your money won’t go as far when you come to spend it.
Risk and Reward
We’d all like our money to grow substantially without risking our original investment amount. Unfortunately, this isn’t possible. Almost all investment involves some degree of risk. What’s important is that you understand, and are comfortable with, the risks you’re taking.
For example, if you put your money in a bank account, there’s almost no risk, but the interest you’ll get will probably be quite low, particularly iif you take inflation into account. On the other hand, investing your money in a single company’s shares is high risk, as you are dependent on that one company’s fortunes. If something happens to that company, it will change the value of your shares, and in the worst case, you could lose all your money. However, your reward is potentially much greater, as you could make a large gain.
Higher risk, generally, does mean the potential for higher rewards, but it also comes with a greater chance of your money decreasing. On the other hand, a lower risk has a smaller chance of loss, but the growth of your money will normally be less.
You should make sure you understand, and are prepared to take these risks before you choose your funds.
Low Risk attitude to investing
If you’re only prepared to take minimal risk it’s likely that your main concern is the security of your money.
• You prefer investing in banks and building society deposits
• You look for stability in the value of your investment
• You view the security of your money as more important than the possibility of the buying power of your money reducing as a result of inflation
• You’re unlikely to invest in shares or property and would prefer funds that didn’t do this
Minimal risk funds tend to be cash or cash-like investments. Minimal risk doesn’t mean there’s no risk.
Cautious Risk attitude to investing
It’s likely that, you look for the security that your investment’s value won’t go up and down a lot.
• You’re happy to invest in non-cash assets, such as fixed interest securities
• You accept that the value of your investment isn’t guaranteed and might go down as well as up
• You’re comfortable with some of your money being invested in shares, but not all of it, and some of it may be outside the UK
• You accept that it’s possible you may lose some of what you invested for the prospect of better growth
• You’ll probably want to spread your money across different types of investments, which should help to reduce the risk by balancing out one type of risk against another
Cautious risk funds tend to have a mix of investment types or just fixed interest securities
Medium Risk attitude to investing
It’s likely that you already have an interest in investing and are comfortable with the ups and downs of the stock market.
• You’re happy to put a significant proportion of your money in shares or other unpredictable investment types
• You accept that there’s a real risk of losing your money, but this is balanced with the prospect of greater growth
• You’re likely not to mind investing outside the UK
• You might have an interest in and knowledge of the stock market
• You understand the general risks involved with investing
Medium risk funds take risks to provide greater returns. They tend to contain higher risk fixed interest investments, shares and commercial property. These may be outside the UK.
High Risk attitude to investing
It’s likely that you’re an experienced and knowledgeable investor, whose primary aim is to achieve the highest possible returns on your money, while accepting that this means taking substantial risks.
• You’re happy to invest in funds in specialist areas or new markets, or both
• You’re looking for high returns on your money, and you’re willing to take substantial levels of risk to achieve it
• You accept that there’s a real risk of losing your money, but this is balanced with the prospect of greater growth
• You’re attracted to new markets with substantial risk, or enjoy trying new types of investment
• You accept that the value of your investment can change rapidly and by a large amount, possibly resulting in total loss of your money
• You’re experienced in investing in the stock markets, and probably already manage a range of your own investments
• You understand the risks posed to your money when investing, particularly that your investment is very likely to regularly go up and down in value
High risk funds tend to be in specialised areas or in one or more countries outside the UK.
No matter how much money you have to invest, you should always keep some money in deposit accounts to give you flexibility for the short term. Having reached a figure you’re happy to keep in savings for your short term needs, what’s left is what you can invest for the medium to long term which means at least five years, ideally more.
If you have credit card balances or other long-term debts, it’s prudent to pay off what you owe before considering investing. That’s because the interest rates on personal loans and especially on credit cards, can be high. So any growth you achieve by investing will be overshadowed by the interest you pay on what you owe.
It’s important that you review both your investments and your own circumstances regularly to make sure that the funds you have chosen continue to offer the best solution for your needs. Regular reviews with your financial adviser can help you keep your portfolio on track as markets change over time.
A financial adviser can help you identify your objectives and attitude to risk and then recommend the best fund options based on your answers.
If you are considering any kind of investment such as ISAs or Bonds we will happily advise on your best options
“The value of your investment can fall as well as rise and you may get back less than you pay in.”