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Financial Products

There are many ways you can invest your money. These pages provide information on how the main savings and investment vehicles work.

Bank and building societies National savings Gilt edge stock Individual savings accounts Unit Trusts
Bonds Stocks and Shares Investment Trusts Annuties Regular saving plans

 

 

Bank and building societies

Banks and Building Societies have a reputation for providing a safe home for cash and longer term savings. However, the traditional divide, that banks offered lower interest rates but more facilities and building societies offered higher rates but fewer extras, is now beginning to break down. Mergers, conversions and the emergence of other banking institutions, such as supermarkets and insurance companies, makes the choice of account and the efficient management of everyday finance more complex. The competition between institutions has meant that the differences are becoming more finely tuned to particular groups of people and to different lifestyles and financial needs.

There are now well over 100 organisations offering nearly 500 types of account, each with advantages and disadvantages to any user. .

General comments
In a variable interest account your money will be secure but its value may be eroded by inflation.

New types of account are constantly being offered which may give you advantages. Changes in interest rates may be made or the conditions on accounts may be changed. The account may be ‘closed', ie. no longer open to new investors, and held at the interest rate applying at the date of closure. You may or may not be notified so it is very important to review your accounts every month or so to ensure they offer the same benefits as when you opened them.

Interest rates on bank and building society deposits are quoted gross at the AER - Annual Equivalent Rate.

Income tax is normally deducted at the investment income rate of 20%. Investment income taxed at this rate is deemed to satisfy tax liability at the standard rate. It will only attract additional tax if your total income puts you into the higher rate tax bracket.

Non-taxpayers, (people whose total income from all sources in a tax year will be below the personal allowance),can apply to have their interest paid without tax being deducted at source. Fill in form R85, available directly from the society or the Inland Revenue.

You must declare all bank and building society interest on your income tax return. You can claim tax back at the end of the tax year if your total income has been below the personal allowance. It is important to save the tax certificate which the bank or building society sends as the Inland Revenue will require to see this before making any repayment.


Interest rates.
When selecting an account there will be major differences in interest rates. Chasing small differences in rates must be balanced against the trouble of changing the account and on other conditions which might be imposed. An extra ½% interest may be tempting but the actual return to a basic rate taxpayer is only £5.00 per year gross for every £1000 invested.

In most types of account the interest rates are ‘tiered', the rate increasing in bands as the amount deposited increases. This is true within any one institution but the same amount in the same type of account elsewhere may attract a lower (or higher) rate. Equally, different types of account offer lower or higher rates with different providers. For example, a 40 day term account rate in bank A may be lower than an instant access account in society B. Rates are variable and can change at any time. Some interest rates are linked to the bank base rate. It is common for rates to change without notice being given to depositors.

Interest rates are now quoted as an Annual Equivalent Rate - AER. Under this rule, rates must be shown as if they were paid annually and compounded. Conditions, limits to access, how long it takes to obtain cash etc. must be specified. The intention is to make comparison between accounts easier.


Types of account
The way banks and building societies describe their accounts raises questions about how you operate your finances. Accounts are sold on their best features, the ‘downside' is less obvious. Many people stay with the account they have had for years even though it has been overtaken by better options. The choice of account/s depends on which factors are most important to you.

Branch based accounts
The traditional high street banks or building societies are still very much in evidence although many closures have occurred in the past few years. They are handy but generally lower interest rates make them less attractive when compared with other more convenient methods of withdrawing and depositing cash, often from the same organisation. How often do you actually need to go into a branch?

Postal accounts
Accounts operated entirely by post where the expense of the branches is cut out. The savings in costs result in higher interest rates being offered even on easy access.

They may offer term accounts or quick access. (Accounts can only be called Instant Access when cash is available over the counter or from an ATM). Some postal accounts offer cash cards, standing order facilities and allow regular deposits, eg pension payments, to be made.

Withdrawals are made by filling in a withdrawal slip and posting it or in some accounts you may instruct by telephone. Payment will be by cheque (by return or after the notice period) payable to you or to a third party. There may be a short delay before the cheque clears. In some accounts cash can be electronically transferred to another account for rapid availability.

Telephone accounts (Telephone banking)
Many institutions offer a ‘home banking' account where all transactions are done over the phone either by speaking with an operator or by touch tone and voice activation. Some screen based accounts are available using the internet. This will involve switching on and connecting but you may have a visual display of your account details and transaction.

Some of the telephone accounts offer a full range of banking services on a 24 hour 365 day basis, others have a more limited range. Cheque books are usually supplied and cash may be withdrawn using cash machines or, with some cards, from supermarkets. Deposits are made by direct transfer or by post.

Bill payments may be set up and be paid on instruction, money transferred between accounts and loans negotiated, all by phone at midnight if you so wish! Calls are normally at local charge rates.The interest rates are fairly low level but may be marginally higher than a branch account.

Some building societies and banks offer savings accounts which allow withdrawals (in the form of cheques) and transfers to be authorised by telephone. These accounts may offer high interest and/or easy access but no other banking services.

Internet accounts
Accounts are becoming available from high street names and from other specialist providers which can be operated via the internet. They enable you to move money between accounts, pay bills, view transactions and balances on screen. Interest rates vary as do the facilities the account provides. Security of the accounts has been questioned but the technology is developing rapidly.

If you wish to check out the various accounts and compare their facilities, the Financial Times has a useful section at their website. Compare internet accounts


Accessibility
The word ‘instant' has slightly different implications depending on the type of account. One type may suit your needs better than another.
  • Instant Access means cash can be obtained over the counter from a branch based account. Such instant access accounts usually offer the lowest rate of interest of all. (The exception being some new supermarket accounts which offer high rates on small deposits).
  • Quick Access means that withdrawals can be by cheque made payable to you or to a third party (like the gas man). This facility is normally offered by postal accounts and some term accounts. There may be a minimum deposit, say £1000 or more to open or maintain the account at the high rate. The cheque will need time to clear if used to pay credit cards or into another personal account.
  • Direct transfers allow you to arrange the payment of bills immediately by a telephone instruction, eg. a credit card, or to transfer cash from one account to another. This facility is available from some postal accounts and from telephone banks but the interest rates may be lower.

Term or Notice Accounts
Accounts which offer higher rates of interest the longer you are prepared to wait before withdrawing money. The terms on different accounts vary between 20 and 180 days. Withdrawals can be made in less than the stated term, but penalties and conditions are imposed which reduce the effective interest rate.

These penalties may involve a loss of interest for the term, a minimum charge, a limit on the number of withdrawals in a year or a ‘bonus', ie. the full advertised rate, if only a set number of withdrawals are made in a year.

Note the interest rates on branch based term accounts are sometimes less than those given on postal instant access accounts.


Where to obtain information
High street branches have advisers to give information about their own products but details of the postal services may not be available at your branch.

Details of each type of account in every building society, bank, supermarket and insurance company are published each month in 'Moneyfacts', a magazine available in reference libraries. Individual copies of the magazine can also be purchased by telephoning the publisher on 01692 500765.

A selection of the best current interest rates is published in many newspapers in their 'Family Finance' sections. The telephone numbers of the providers are given and you can request further details directly.

There are many web sites showing current rates and details of accounts. Check in the finance section of the 'Links' pages.

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National savings

Several savings schemes are promoted by the Government to encourage people to invest. They are normally aimed at the saver who attaches high importance to capital security.

Investment Account
An Investment Account is operated in a similar way to a building society or bank account except that  Interest is paid gross. However, it is part of the taxpayer's taxable income if they are liable to tax and must be declared on the tax return. It is credited yearly on 31 December. The minimum initial deposit is quite low and this account may be an appropriate choice for anyone whose income is less than their tax allowances, eg. non-working spouses or children with small savings.

Fixed Interest Savings Certificates
are aimed at a different type of saver. They are tax-free investments with terms of two or five years, with interest increasing each year over the life of the certificates. If the certificates are cashed in the first year no interest is paid. In subsequent years the average rate of interest increases but the full tax-free benefit is only realised at the end of the term. The average tax free interest rate may be more attractive to the higher rate taxpayer who would normally expect to pay higher rate tax on additional income.

Index Linked Savings Certificates
These certificates offer 2 and 5 year investments paying interest equal to the rate of inflation. The Government pays a bonus on top of this provided the certificates are kept for the full term. This encourages investors not to withdraw their capital. No interest is payable if the certificates are cashed in the first year and reduced rates of bonus apply if they are cashed before the full term. Once the bonus is set it will last for the life of the certificates. All returns are tax free.

Income Bonds
provide investors with monthly income paid without tax deducted. The income is taxable, however, and the investor is responsible for declaring and paying any tax due. You can cash in all or part of the bond, three months notice is required for withdrawals. (You can withdraw cash immediately subject to 90 days loss of interest). Only half the interest is payable if withdrawals are made in the first year but there is no penalty on withdrawals after the first year.

65 plus Growth Bonds
Suitable for savers who want a fixed and guaranteed rate of interest, are aged 65 or over, can leave their money invested for 1 or 3 years and have at least £500 to invest. Not for those who want easy access to their money or who want a regular income.

Capital Bonds
provide a fixed rate of interest over a five year term. Although interest is paid gross at the end of the term, it is taxable and the tax must be paid each year on the interest earned. A statement of the interest paid into the bond is sent to bond holders each year and it must be declared on the tax return. The tax due is then paid out of other income during the year.

Early encashment is possible but, if the bond is encashed in the first year, no interest is payable. Successively higher rates are paid if the bond is encashed in succeeding years. The full quoted rate is only available if the bond is held for the full term.

Further information
Leaflets describing all National Savings products, together with current interest rates, are available at Post Offices, by telephoning the Sales Information Helpline on 0645 645000 or on the National Savings web site.

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Government stocks - (Gilts)

Government Stocks, commonly known as Gilts or Gilt Edged Securities are of value to people who need a predictable, fixed income with a guarantee of the return of capital at a known time.

The stock is purchased at the market price, which will vary over time. At a fixed date the face value of the stock will be returned or 'redeemed'.

Despite the stock having a redemption date it can be sold wholly or in part at any time at the current market price. The investor is not 'locked in' and there is no penalty for selling. Alternatively, the investor can continue to receive a fixed income until the redemption date of the stock. At this time, the government will repay the actual face value of the stock, which might be more or less than the price originally paid, giving a capital gain or loss.

The rate of interest on a particular stock is fixed at the time of issue and does not change when other interest rates rise or fall. The income is therefore predictable but does not necessarily keep pace with inflation. The price of the stock varies depending on interest rates in general.

Gilts are useful investments to buy when interest rates are high and are likely to fall. If general interest rates fall, the price of the stock rises and it may be sold at a profit. Conversely, if interest rates are low, the price of Gilts is high and a loss can be anticipated if the stock is held to redemption.

Buying and selling Gilts - Many gilts are available from the National Savings Register via the National Savings at Blackpool. (For further information telephone 0645 645000). These pay interest without tax being deducted but the interest is taxable if you are a taxpayer. The charges to buy or sell gilts through the National Savings register are very low. Gilts can be sold at any time, transactions taking about one week.

Gilts can also be purchased through banks or stockbrokers but dealing charges are much higher. Interest on Gilts so purchased is paid with tax deducted at source. A tax certificate is issued which can be used to support a reclaim, these certificates are valuable and should be saved.

A explanatory booklet, 'Investing in Gilts', published by the Bank of England, is available on request at some Post Office Counters or from the Bank of England, Tel: 0171-601 4540. There is also a National Savings leaflet on the same subject freely available from all Post Offices.

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Individual Savings Accounts

(ISAs) - are designed to enable individuals, aged 18 or over, to bring together a range of savings in a tax free one-stop account. There will be no minimum lock-in period.

Marketing
ISAs are marketed by financial institutions and other providers, such as supermarkets and individual advisers who will offer other peoples' products. Each may offer savers one or more of the components.

There is an annual Isa allowance, set by Governnent, per individual. There is no maximum holding that you can accumulate within an ISA.

Taxation
All capital gains on ISAs will be tax-free but from April 2004 no tax credit is given on dividends. For example, shares/unit trusts yielding £100 dividends outside an ISA would yield the same £100 if held in an ISA. However, if the investment yielded returns subject to income tax they would be tax free.

Income and capital growth generated within an ISA does not have to be declared on your tax return form.

ISA Options
In any tax year only one cash ISA and one stocks and shares ISA can be opened.

Cash may be in familiar accounts in banks and building societies or in National Savings but remember, some National Savings products are tax free already and have a 2 or 5 year term.

Investments in the stock market include stocks and shares, Investment or Unit Trusts, OEICs, corporate bonds. Shares may be in non UK or European companies and pooled investments may have a significant proportion of their funds outside the European Union.

Risk and security
Cash in an ISA account has the same security as any other cash deposit.

Stock market investments in ISAs are intended for longer term growth (or income in some products). The capital value of such investments, shares, unit and investment trusts etc. will fluctuate on a day to day basis. The dividend income may also vary. In the longer term, say 5 years and more, the capital value has risen in the past but, as is so often said, this is no guarantee that it will in the future. Such investments should not be made if the cash may be needed again in the short term.

Access and flexibility
Investors will have access to all or part of their investments at any time but regardless of any withdrawals, the maximum yearly subscription stays at the rate pertaining in the current tax year. If funds are withdrawn, it is not possible to replace the withdrawn cash or top up the account in the same tax year.

You can switch ISA funds between proividers in the tax year you bought them and transfer to a new provider in subsequent years if you wish.

Charges and costs
The government is imposing a standard on the running of ISA - the CAT standard - Charges, Access, Terms. Each element has its own set of regulations which prescribe what the ISA must offer in terms of a maximum rate of charges, a maximum waiting time for withdrawals (and a minimum deposit or premium) and a minimum interest rate. Not all companies will be marketing CAT standard ISAs.

Existing Personal Equity Plans
PEPs taken out before 5 April 1999 are now converted to and ISA with no change in their tax treatment.

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Unit Trusts and OEICs

Unit Trusts
Managers of unit trusts pool money from investors and buy a portfolio of the shares of companies - often referred to as 'equities'. Each investor holds 'units' which represent the spread of shares held in the portfolio. This makes it an easy and relatively safe way to invest in shares as the inherent risk of equity investment is spread over a large number of holdings. The value of the units is directly linked to the value of the shares held in the portfolio.

OEICs, (Open Ended Investment Companies)
work in a similar way but are set up as limited companies. The investor holds shares of that company but the price is linked to the value of the underlying assets. The pricing structure is different (see "pricing" below) but the investment risks remain similar to that of unit trusts.

If an investor holds shares in a single company and that company runs into financial difficulties, it is possible that the total investment could be lost. If the shares were included in a unit trust or OEIC, they would be part of perhaps 200 holdings in the fund and the effect of that one failure would be less significant. The risk of the unit trust or OEIC holding such a poor share is considerably reduced as the fund managers closely analyse the companies they invest in and constantly monitor performance. Nevertheless, risk cannot be totally excluded.

However good long term performance may be, it must be stressed that unit trusts and OEICs are investments in the stock market and that markets and prices do fluctuate. Losses can be made as well as gains.

Generally, unit trusts and OEICs should be considered more as a long term investment over five years or more, although they can be bought and sold at very short notice.

There are a large number of funds from which to choose, involving varying degrees of risk. It is possible to buy unit trusts and OEICs which invest only in one stock market, (eg Japan or UK); in specialist sectors within a particular market, (eg electricals or foods). Others may hold a more general spread of investments in their portfolio. It is even possible to invest in companies and follow a particular personal philosophy, eg. 'green' or non-defence related. Some funds managers offer 'Tracker Funds' which are intended to match (but not beat) a particular Stock Market index.

Fund performance varies widely, dependent not only on the skill of the fund managers but also on the underlying strength of the market in which the fund is invested. It is, therefore, essential to spread investments. It is arguably safer to invest say, £1000 in each of three funds in different markets and with different managers than to invest £3000 in one unit fund.

Unit trusts can be selected according to whether income or capital growth is the priority and income, known as a 'distribution', can usually be reinvested. Some funds aim both to produce modest income immediately and also to generate capital growth. Many of these have been successful in protecting both income and capital from the effects of inflation.

All distribution income is paid with tax deducted. Non-taxpayers cannot reclaim the tax. The distributions are usually paid six-monthly.

Growth in the price of the units is treated as a capital gain for tax purposes but investors will only be subject to tax on sale profits if they have used up their full capital gains allowance for the year. The treatment of unit trust growth for Capital Gains Tax is described in detail under ‘Personal Taxation'. (See Taxation through the Information index).

Pricing
Unit Trusts are bought at an 'Offer' price and are sold at a 'Bid' price. The spread between these two, about 6%, covers the management charges and commissions. OEICs have a single price and the setup and commission charges are added when you buy.

There may be an annual charge deducted from the fund value, this can vary from ½ to 1½%. Reselling early, before the costs have been recouped by an increase in the unit value, will lead to a loss of capital.

Before investing money in unit trusts or OEICs, it is important that some of your capital or savings is held in a more accessible (liquid) form so that in an emergency money can be obtained without being forced to sell the unit trusts at a time when the markets are low.

In choosing a unit trust or OEIC, it may be helpful to seek the assistance of an investment adviser. The commission paid to an adviser is no different from the charges you would pay if you purchased the units direct. As most fund managers pay the same commission rates there is little risk of you being recommended to use a particular fund manager because your adviser is obtaining more commission from one manager than another.

Performance
The performance of all authorised funds for the past ten years is listed in a number of magazines available at newsagents. eg 'Money Observer', 'Money Management', 'What Investment'. Performance is ranked within each market sector and although it is not possible to predict future performance from these tables, some idea of the consistency of performance over a long period can be obtained.

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Bonds

The word 'Bond' is frequently used and can cause confusion. There are many different financial products incorporating the word and it has tended to become just a name rather than an indication of what the product actually is or does.

Fixed Term/Fixed Rate Bonds
Offered by building societies and banks for between one and five years. Retail Co-operative Societies and Local Authorities offer similar bonds where the term may be up to eight years.

Escalator Bonds
Offered by building societies and banks. Normally a five year deposit offering fixed rates which start low and increase yearly during the life of the bond. Early encashment may not be advisable.

Corporate Bonds
are issued by companies and are available within ISAs, unit trusts and OEICs. They offer a fixed rate of return but no capital growth. They can be bought in an ISA to give ‘tax free' income. You are usually not guaranteed to get all your capital back at encashment.

Income and Growth Bonds
Run by Life Assurance companies, these bonds may offer either regular income, capital growth or a combination of these on capital sums invested for terms between one and five years or more. Guarantees may cover income, capital, both or neither.

Income and Capital Gains Tax is paid by the life company within the fund and therefore investment returns are tax paid to the basic rate taxpayer, normally attracting no further tax liability. Consequently, because this tax cannot be reclaimed, such products may not be the most tax efficient for many taxpayers, especially non-taxpayers, or those who have not used their Capital Gains Tax allowance.

Higher rate taxpayers may have a liability on income taken from the bond which is over a certain level. They can, however, delay any liability to high rate tax until their other income drops, say at retirement. The liability to higher rate tax on the bond is then eliminated.

65+ Growth Bonds
Suitable for savers who want a fixed and guaranteed rate of interest, are aged 65 or over, can leave their money invested for 1 or 3 years, and have at least £500 to invest. Not for those who want easy access to their money or who want a regular income.

Guaranteed Growth Bonds
are similar to Income Bonds with the 'income' being reinvested and paid out at maturity.With Profits Bonds are intended to give capital growth over a fixed period through stock market investment but without the normally associated risk. The capital is invested in a wide spread of equities, gilts, cash funds, property etc. to provide a balanced portfolio. Some bonds may be 'Unit Linked', the capital buying units at a fixed unit value.

Growth is achieved by 'bonus units' being added periodically by the insurance company. Once the bonus units are added they become guaranteed to be paid at the end of the fixed term or taken as an ‘income'. At the end of the term, 'terminal bonus' units may be added which reflect overall performance during the life of the bond. Final growth figures are not guaranteed. Because of the potential value of the terminal bonus, early encashment is not advisable.

Distribution Bonds
are intended to give income and capital growth but, as they are stock market based, guarantees are more dependent on market conditions and need to be understood. The capital buys 'units' which are then sold to provide the income. . If guarantees are given, they may, for instance, link capital return to an index performance over five years or they may be affected by the level of income you choose to take.

Managed Bonds
allow a balance of income and growth to be achieved in a similar way to the distribution bond but with more active management by the provider and the investor allowing more flexibility to change investments within the fund. Performance may be better but there is consequently a higher risk to the capital. The capital buys units which can then be sold.

Provided the unit value increases at a rate which replaces the income taken, the value of the capital is retained. However, if a regular income is taken and the units have decreased in value, there is a possibility of the original capital being much reduced by the end of the term.

Both distribution and managed bonds can be sold once they are in place, but the timing of the sale, the levels of income they have given and the value of the underlying assets affect the price you would get.

Buying bonds
It is very important to understand what type of bond you are considering, how it works and to remember that performance between different providers varies dramatically. It is strongly recommended to seek professional advice.

Probe carefully all the charges, especially in case of early encashment. Under the legislation, surrender values must be stated and all advisers have to disclose the charges involved. This will include their commission.

Ask for detailed information about how they work, do not just rely on a sales brochure. For instance, is return of the capital guaranteed in whole or will it depend on performance? If the income is guaranteed, what will happen to the capital if interest rates go down? Is the level of income realistic in relation to general rates?

Guarantees of the return of capital, or of particularly attractive fixed rates of interest over a long period, should be questioned and understood fully before proceeding.

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Stocks & shares

If you buy shares in a company the aim is to benefit from the increase in value of the company over time (a capital gain) and from any dividends, (your share of the profits). The value of the company and the profit can vary in the short and longer term - down as well as up!

Buying shares in your employing company through a share option plan, or purchasing a limited number of shares in a company which provides useful perks, may offer advantages over and above the usual reasons for buying shares.

However, for an individual to invest a capital sum directly on the stock market as a means of providing a regular source of income or growth would involve a much higher degree of risk than even unit trusts or investment trusts.

It is suggested that if shares are to be the mainstay of your growth fund, anyone with less than £50-60,000 to invest, (in addition to cash in low risk investments and immediate access accounts), will not be able to obtain the spread of investment necessary to keep risk to an acceptable level. The gains on smaller sums can be eaten up by the costs involved in buying and selling the shares.

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Investment trusts

The directors of an investment trust company are responsible for the management of a portfolio of shares in the same way as the manager of a unit trust but the legal structure is different.

The total value of units issued by a unit trust equals the value of the underlying investments. In an investment trust, a fixed number of shares are issued on the stock market and the price of the trust company's shares will rise or fall independently of the value of the portfolio it holds. This can make it a more volatile investment.

It is also possible for an investment trust to borrow money to buy shares, (which a unit trust cannot) and this may give it an advantage over the unit trust when interest rates are low and the markets are rising. As with any equity investment, however, the opposite could also be true.

Investment trusts could be attractive to the more sophisticated investor while unit trusts are a less complex investment for anyone new to equity based investment.

It is strongly recommended that professional advice be sought before considering investment trusts. Performance tables of investment trusts are to be found in 'Money Management' and other financial magazines. Further information about investment trusts is available from the Association of Investment Trust Companies, 16 Finsbury Circus, London EC2M 7JJ. The association issues an extensive information pack free.

Real Estate Investment Trusts (REITs)

REITs provide a means of investing in property without the need to own the property itself. They are collective investments where investors’ money is pooled to buy mainly commercial but also private property. The company, an ‘Investment Trust Company’, (see page 24) then sells shares in the company which pay dividends and which can rise and fall in value depending on the conditions of the market and the values of the properties owned within the trust.

They are tax efficient in that the investor does not pay income tax on the rental income generated in the trust nor capital gains tax on the rise in value of the properties themselves. Instead, the normal rates of income and capital gains are is charged as with any share holding.

As with any share, they can be bought and sold at any time and there are no restrictions on the number of shares held or the time they are held. They can be bought within an ISA and a SIPP.

The risks are comparable to any holding in a specific market sector, they will fluctuate in value with markets in general but also with the movements in that particular sector.

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Annuities

An annuity is a method of providing income from a capital sum which is invested with an insurance company at a quoted rate of interest. It is normally purchased to provide a pension at retirement.

When an annuity is purchased by you (or on your behalf by your employer), the cash paid to the insurance company can NEVER be recovered but the company guarantees to pay you an income for life.

The length of time for which the annuity is taken out will affect the level of income you will receive. The longer the contract is expected to run (ie. the younger you are), the lower the rate. Similarly, choosing escalating income and/or joint life contracts will affect the income level. Consequently, an annuity will provide a better income for the older investor. At any given age, women can expect a lower rate than men due to their longer life expectancy.

For couples, joint life annuities should be carefully considered, so that the income continues to be paid to the surviving spouse.

Compulsory purchase annuities -
must be bought with the money built up in personal pensions, AVCs and some other types of pension fund, although there may now be flexibility regarding when to buy. The company with which the pension fund has been invested need not be the one from which you buy the annuity, known as the 'open market option'. The whole of the annual payment will be added to your other income and taxed accordingly. Non-taxpayers can have it paid gross.

Purchased life annuities -
bought by individuals with a capital sum. They provide income at a constant level or at a lower rate at the start, rising during the life of the annuity. The major proportion of the annuity income is repayment of capital and only the (smaller) interest element is taxable.

Fixed term annuities -
are a special class of annuity which can be issued for, say, 5 or 10 years. These provide a very high level of income but, by the end of the period, all the capital will have been used up in making the income payments.

Fixed term annuities are normally issued in association with another investment designed to replace the capital used up by the annuity. The quality and security of this investment will determine how much of the original sum will be returned at maturity.

Annuity rates are linked to the interest rate prevailing at the time they are taken out. Despite this, there are wide variations between the rates offered by different companies. Whichever type of annuity you are buying, it is strongly recommended that you shop around and take professional advice.

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Regular saving plans

Not everyone starts out with a large lump sum to invest but it is surprising how soon a substantial sum can be built up by regularly saving surplus cash, however little this may seem at first. While your income is predictable, this might take the form of a regular monthly commitment but there are also many opportunities to invest occasional savings without making a commitment.

Many unit or investment trusts are suitable for regular savings for the longer term. You can, of course, put money into a bank or building society as often as you like. The disadvantage is that you might be tempted to take it out again!

Many unit and investment trusts offer the opportunity for regular savings. This can offer some advantages as your money will buy more units when the price is low than when it is high. This is often referred to a 'Pound Cost Averaging'. It allows you to take advantage of downward trends in the market and benefit from their subsequent recovery. Regular saving can also remove the worry of deciding when to invest, reducing the risk of investing at a bad time. The minimum monthly amount which the manager may accept may be as little as £25.

If unit or investment trust savings are made inside an ISA you can also take advantage of the tax benefits. Most ISA plan managers offer the facility for regular savings.

For those who cannot commit themselves to a fixed regular subscription, investment managers will often accept occasional lump sums. Unit and investment trust investments can be made at any time.

For those in non-pensioned employment, a Personal Pension plan, either on a regular basis or as an occasional lump sum investment, may offer a tax efficient way of building up funds to be taken as income at retirement. It is recommended, however, that advice be sought as this may not be the most efficient or appropriate way of investing if you are within a few years of retirement.

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