Investments

ISA’S

Since April 1999, the most tax-efficient way to invest has been in an ISA.

The ISA provides a tax efficient shelter whether you are saving cash or investing in shares.

Any income from the ISA, and any capital growth, is tax-free.

The ISA is best seen as a wrapper that individuals can use to keep a range of investments and savings away from the clutches of the tax system. It is the natural successor to the Pep (personal equity plan) but unlike the Pep there is greater freedom to invest in shares outside the UK.

The total investment limit for an ISA is £7000 in any financial year.

There are various fund supermarkets which allow a greater choice of funds to choose from without breaking  ISA rules.

 PEP's. (Personal Equity Plans)

In the days before the ISA age there were Personal Equity Plans - or PEP's.

Broadly speaking they worked in a similar way to the investment part of an ISA, although the contribution limits were higher (£9,000 compared with £7,000 for an ISA).

Millions of investors still hold PEP's and although it's not possible to put any more funds in, PEP holders can still transfer their funds to a different PEP management company.

This could happen if an investor is unhappy with the way a fund is performing, or because they have different investment objectives, having developed a more cautious attitude to risk for example.

PEP companies will almost always levy charges for switching to another provider, and if the sums involved are large it could pay to take professional advice from IFA.

Friendly Societies

Friendly societies are old-established mutual organisations. Investments in them grow tax free, and they are a popular way to save for children and grandchildren.

The contribution limits for friendly societies are low, at £25 a month but charges are relatively high, especially as the monthly contribution has to pay for a life assurance element.

Friendly society policies are worth considering once all other tax vehicles have been used up. Friendly societies invest a proportion of their members' money in the stock market, in cash and in fixed-interest investments.

Investment Trusts

An Investement Trust allows a professional fund manager to invest in shares for you. You benefit from their knowledge and experience and also get access to shares and markets that you wouldn’t normally consider.

Investment Trusts can also help to maximize your tax savings, included as part of a personal pension plan or ISA.

Investement Trusts can also allow regular monthly savings - for most funds the minimum is £50. Investing monthly also helps to smooth out the ups and downs of the stock market (a process known as pound-cost averaging).

There are several different vehicles for collective investments.

-- Unit Trusts
-- Investment Trusts
-- OEICS (Open-ended Investment Companies)

A tracker fund is the simplest and cheapest way to invest in the stock market.

-- The argument in favour of trackers is; if a skilled fund manager can't beat the index, why not just copy it?

-- The argument against tracker funds is that they can't offer the startling year-on-year growth that some actively managed funds achieve.

-- Doing away with extensive fund management teams cuts costs, so fees can be cut to the bone. Several trackers have no initial charge.

-- The best-known tracker funds are available for inclusion in an ISA and most accept monthly payments, so they suit investors with limited amounts to put aside.

Bonds

Bonds are a way for companies and governments to raise money.

As a bond holder, you are lending your money to a company or organisation in return for interest.

Unlike shares, bonds don't give investors a say in how companies are run. The income is fixed when the bond is issued; the rate of interest is also known as the "coupon".

Once the bond is issued, it continues to pay interest at that rate until it reaches maturity, whatever happens to general interest rates. At maturity, the capital is paid back at face value.

Companies that issue bonds are rated for credit-worthiness. These ratings show how risky it is to lend to these firms: AAA represents a very solid investment; AA is only a little less secure, BBB is riskier; CCC indicates that a company is very likely to default. Poorer-rated investments will pay a higher interest rate, reflecting the risk to investors' capital.

Bonds are normally issued in blocks worth 100,000 pounds or more. This means for all but the wealthiest private investor, the only realistic option is a bond fund. Investors buy bonds through their stockbrokers.

Bond funds operate like unit trusts, but the fund manager buys bonds and Gilts instead of shares. This gives investors access to a much wider range of bonds, and the input of a professional management team. Bond funds can be held as ISA's

Gilts

UK Government bonds are known as Gilts. They are the most secure way to invest, as the Government is unlikely to default. As long as an investor buys a Gilt at face value or below, he or she will get the capital back.

UK Government bonds can be bought from National Savings or at a Post Office.

Offshore Investments

For UK residents, the more common offshore investment centres tend to be the Channel Islands, Gibraltar and Luxembourg.

A common misconception is that investing offshore is tax-free. Offshore accounts pay interest gross, but that does not mean that it is tax-free. You must declare any interest paid on your annual tax return for that year and pay any tax due

The interest rates offered by offshore accounts tend to be broadly comparable with those in the UK, meaning that most UK investors actually have little to gain by opening such accounts.

For tax purposes, offshore funds are classed as either having distributor or non-distributor status. The distinction is important, as for non-distributor status funds both gains and income are subject to income tax, which may not prove very tax efficient.

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