Investment Options

Despite the fact that the banks' and building societies' deposit accounts are safe, they have suffered severely as interest rates drop.

Investors who are willing to take slightly more risk with their money can potentially achieve better returns over the longer term than if their money was left on deposit without having to go as far as taking the higher risk of investing in individual companies where the value of your shares can vary from day to day.

There are many thousands of different investments opportunities available in the UK, and many more in Europe and throughout the world, and you must decide what level of risk you are willing to take, whether you need income from the investment, your tax situation and the number of years that you are prepared to invest.

If you have a lump sum of money available, it is sensible to put some of this spare cash in a deposit account with easy access to give flexibility and to cope with any unexpected expenses. However, you should research which accounts are paying the highest interest without requiring an extended notice period to draw cash or limiting the amounts that can be taken withdrawn.

It is generally believed that only investing in deposit accounts from the likes of banks and building societies means that your money is not likely to grow faster than the rate of inflation which, in turn, means that the value of your savings actually reduces, in real terms.

If you are interested in investing in shares, most insurance and fund management companies provide collective investment schemes, where you in effect add your money to other people's investments so you are can have a spread of investments over a greater number of shares, thereby reducing your risk.

It is always sensible to use the tax efficiency of ISAs with your investments, wherever they are placed, which offers a maximum savings amount of £7,000 per annum per person without tax being payable on the profits from the investment. However, it should always be remembered that high possibility of growth is always accompanied by an equally high risk and investments can go down as well as up, as many people found in the period from 2000 to 2002.

For a greater degree of safety, you should consider with profits bonds where your money is invested in the company's with profits fund that will invest spread its investment between shares, fixed interest stock, gilts and property. The spread of investments means that the risks inherent in certain investments is mollified as was seen in 2000 to 2002 where stocks and shares, interest on savings on deposit were steady but low and the value of property soared. Companies in this market tend to keep some profit made when growth is high to increase the return in years when profits are lower, so protecting the investor from the erratic changes in share prices.

Bonds rely on the strength of the company issuing them and its ability to pay bonuses so the company with whom you invest should be strong enough to cover you when growth is low without reducing the bonuses.

One of the benefits of bonds and ISAs is that you can cash in your investment at any time but don't forget that you could get back less than you put in so it is normally recommended that you leave this form of investment in place for at least five years. However, the taxation rules vary between bonds and ISAs and it is important to understand that surrender penalties could be applied to certain forms of investment.

If you are more interested in the unit-trust market, there are a number of investment bonds available which offer access to a range of unit-linked funds which invest in many different areas such as shares, property, stocks and gilts. Like the with profits investments, your money will be added to other investors cash but you are able to choose the funds in which you invest the risk that you are prepared to take.

You can select UK funds or European funds or invest in a managed fund that can invest for you in a mixture of funds through the bond or you can also choose a combination of a fixed rate deposit accounts and unit-linked investments, which are basically invested in shares.

There are many forms of "trusts" such as Unit Trusts, Open Ended Investment Companies (sometimes referred to as OEICs) and Investment Trusts. With these, you invest in a fund run by a management company and your investment is combined with other investors' money and used to buy a wide selection of investments. Trust funds may also give you access to investments to which individual investors may not normally have access. All trusts have rules that govern their investment policies and the levels of risk that they may take and it is important to select the right one for you.

It is the fund manager's job to decide which investments to buy and sell and when to take this action, hence increasing the profit and balancing the risk. Also fund managers have had access to information on market movements which may not be available to individual investors.

Government bonds, often referred to as Gilt-edged securities, offer a low risk buts, as you might expect, so are the potential profits. Gilts are loans made to the Government which then pays you a fixed income, either annually or twice a year. The maturity date of Gilts are short-term, meaning five years or less, medium- term, between five and fifteen years or long-term, 15 years or more. On the maturity date, the gilts are redeemed and the Government pays the original issuing price of the stock to the holder.

Gilts have a fixed interest rate, so when interest rates rise, the capital value of the Gilt falls and visa versa so there is the potential you can make a capital gain (or loss) if you sell before the fixed maturity date depending on interest rates, the popularity of the specific Gilt and the term left to run. Corporate bonds work in the same way as Gilts but they are issued by companies rather than the Government. They are essentially a company's promise to pay you an income for borrowing your money.

They generally pay more than Gilts because there is more of a risk with your money as companies can go bankrupt but there is a great deal more security with the Government. Bonds issued by financially strong companies are known as investment grade bonds and the highest rating is AAA. The risk with these bonds is at the minimum whereas bonds offered by smaller companies whose credit rating is not high will offer higher returns to reflect the higher risk. You can also invest in non-UK companies, which are issued in foreign currencies. This increases your risk still further because the value of the currency in which the bonds are issued will go up and down against sterling. However bond prices are much less volatile than shares so the risk is lower. A Zero (or Zero Dividend Preference Share) does not given any income, hence the name but they pay out to their holders a predetermined fixed capital amount on a set day. This date is usually after about 5 years or so. These shares are normally split capital investment trusts. When an investment trust that issues Zeros comes to its end date, Zeros are usually entitled to the first payout before other shareholders. There is still an element of risk because Zeros may not pay out the anticipated capital amount but you can check the likelihood of a Zero not paying out. However, since their inception, none have failed to pay out the predetermined capital amount on the day.

Guaranteed Income Bonds warrant to give you your money back at the end of the term and in the meantime will pay you a fixed income or interest. There is no potential for capital growth and the rate offered will change in line with interest rates which will not then change, irrespective of what happens to interest rates so check them against other available interest rates to ensure they are competitive.

However, if you do not pay tax, Guaranteed Income Bonds are usually not recommended as tax is deducted from the interest and cannot be reclaimed.

For those paying higher rates of tax, Guaranteed Income Bonds have the attraction that the interest is only taxed at the base level and will not be grossed up as it does with ordinary deposit accounts.

Equity or Stock Market Bonds offer a fixed rate of income or growth over a given term. Your capital is normally returned in full as long as the stock market performs in a stated way but the terms and conditions vary from bond to bond. Some run for two or three years, others for five or longer. Some are linked to the FT-SE 100 (the footsie), and others to the Dow Jones, the NASDAQ, the Nikkei in Japan or a combination of these.

The higher the fixed rate on offer, the tougher the requirement for the index to perform and the greater the likelihood that capital may not be returned in full. There is often a clause stating that, even if the index has fallen by a certain amount by the end of the term, you will not lose any money. But once it goes beyond that stated amount net, you can lose a percentage of your capital.

If markets are low when your bond matures you risk losing your capital, as you do not have a chance to continue with your investment until stock markets recover.

In essence, therefore, there is plenty of choice for you to invest your money and increase your income, even at a time when the Base Rate is low but the very large number of products around makes it difficult to decide which ones will suit you best.

That is where we can help as your Independent Financial Adviser helping you through the maze of products and helping you to decide which investment is right for you.

We will also read and make you aware of the dreaded small print that comes with many of these investments and help you decide what level of risk you should be taking with your money.