www.InvestmentGuide.co.uk
www.InvestmentGuide.co.uk The key to successful and profitable savings and investment is to keep up to date with investment opportunities. If you are in the know, you can take advantage of them. This service describes all the best ways to save and invest - some which you are warned to avoid.
All savings and investments should be reviewed at least once a year. The best time is shortly after the March or April Budget although some tax changes are announced in the so called "Pre-Budget Report" which takes place in November or December. Tax changes proposed in the Pre-Budget Report and the March Budget normally take effect from the following 6 April although some proposals are now announced up to two years ahead.
Some types of investment, however, should be reviewed more frequently. For instance you should check the interest rate on your bank and building society savings every time there is a change in interest rates. A service linked to each individual page and updated every day, tells you the best interest rates from UK banks and building societies and offshore banks. Interest rates don't all go up and down by the same amount. Even if you are notified of a new rate, you won't be told if it has gone down by more than their competitors. Indeed many banks and building societies don't even tell you how much the interest rate cut or rise is, they just give the new rate. Interest rates may or may not rise further before they eventually fall.
Financial commentators often remain preoccupied with short-term changes and forecasts.
The same applies to risk investments - especially if you are investing in shares. You constantly have to keep an eye on what they are doing and make rational decisions about when to buy and sell. A good investment can quickly become a bad one through neglect. No one can really predict if shares will continue strongly, mark-time or even crash. Shares are likely to remain a good bet in the long term but not in every region or sector.
Share prices on the stock exchange also fluctuate up and down. In the short term they may go up and then go down, even if the underlying trend for all shares (although not individual ones) is usually upwards.
Some people say forget about these short term fluctuations. They say invest long term. In practice you have to take both a short and long term view about your savings and investments. There is no best investment for all time.
Savings or investments
What is the difference between savings and investments? The answer is, nowadays, not a lot. Financial institutions which used to specialise have become more alike - and so are the savings and investments which they offer. Many banks and building societies now own life insurance companies and unit trusts, now called OEIC's (Open Ended Investment Companies). Several life insurance companies have their own banks. Most building societies have converted into banks and the only remaining large buildings society with branches throughout the country is the Nationwide.
Saving is what you do with the money from your income which you don't spend. 'Savings' is a description of the amount you have accumulated. 'Investment' is what you do with your savings. The word 'Savings' has another meaning - it usually refers to a simple place for your money, like a bank or building society account. It sometimes also implies you do it regularly, say each month or year. 'Investment' usually refers to something more sophisticated. But the two words can often be interchanged - and generally here the word 'investment' is used to refer to both savings and investment.
What is your money for?
You may want to accumulate as much money as possible. Everyone feels more secure with more money. But you should really work out what you want your money for.
Your time scale
Think about when you will want to use your money. If you want to boost your current income, you will want your money now. If you want to replace your car in five years' time, you will need your money then. If you want to raise your income when you retire, work out how long it will be from now to your planned retirement date, say in 15 years' time.
How much do you need to accumulate?
Although inflation is low by historic standards, it still can have an effect on the value of money. Over long periods of time inflation can have quite a big effect, even at a relatively low rate like 3% a year. For instance at 3% a year inflation, your money loses a quarter of its real value in just over nine years and half its value in 23 years. The rate of inflation in the UK in October 2008 was 4.2% or 4.5% depending on which index you look at. The rate a year later in October 2009 was minus 0.5% or plus 1.8% depending on which index you look at. Over the next 12 months the rate is likely to be positive again, perhaps as much as 2.5%.
It's all very well working out what you need as an income in today's money when you retire. But what about the value of that income year by year after you retire? Unfortunately inflation will eat into that just as surely as it eats into your investments before retirement. At age 65 a man can expect to live for another 15 years to age 80, a woman 20 years to age 85. Many people live even longer, into their late eighties and nineties.
However if you want a rising income to compensate for, say, 4% a year inflation, a Life Insurance Annuity instead of costing £54,000, would cost around 38% more for a man age 65, that's around £75,000, to have the same starting income of £5,400. For a woman the cost is even higher - 45% more for a woman of the same age, or £78,300.
There is another, and probably better, way of investing for a rising income. Instead of allowing your investments to mature at one fixed date, you arrange for enough to mature to keep you at the standard of living you require at your initial retirement age. The rest you leave invested and as inflation bites into your income, you start to draw a second amount or 'segment' and so on until all your investments have been converted from accumulating ones into income producing ones.
If your investment return is high compared to the rate of inflation over a period of 15 years, in reality your retirement income may be much higher.
Your attitude towards risk
Different types of investments have different degrees of risk. There are three main types of risk:
There is no protection from the first risk. If you don't like the idea, avoid those types of investment where capital values fluctuate like shares, unit trusts and stocks although eventually they may turn out to be very profitable.
In the case of the other two, you must take care to whom you entrust your money, although in many cases there are compensation schemes to protect you. In Part 2, each different type of investment has the position summarised under the heading Risk. The position of agents and financial advisers is considered in Best Advice and How to Get It.
Your tax rate
Despite the considerable reduction in direct taxes and the simplification of rules between 1979 and 1988, investment decisions still depend on your tax position. This is described in Keeping Down Your Tax Bill and Capital Gains Tax and Inheritance Tax.
Different types of investment are dealt with in different ways for tax and this is explained in How Different Types of Investment are Taxed. It's also summarised in Part 2 under the heading Tax for each individual type of investment. When describing the plus and minus points of an investment under the heading How worthwhile in Part 2, in most cases it states whether an investment is good at the rate of tax you are paying, e.g. nil, 10%, 18% (for capital gains since 6 April 2008), 20%, 32½% or 40% for individuals depending on the type and size of your income. From 6 April 2010 those with incomes over £150,000 a year will pay at a rate of 50% on the excess.
Money tied up in your home
One investment which you shouldn't forget is the value of your home. There are four ways with which you can utilise this value:
Remember that when you sell an owner occupied home, it's exempt from capital gains tax. If you have more than one home you can choose which one is your main residence which will be exempt. You can back-date the choice by up to two years by writing to your tax office. If one or more of the homes are jointly owned, both owners must sign the letter. However if you rent out the home or use it for a business for part of the time, there may be some tax to pay.
A record of your investments
It's always a good idea to keep methodical records of your investments. The cheapest way is to buy a few different coloured envelope files from a newsagent or stationers. Use one file for each different type of investment, e.g. red for shares, OEICs and unit trusts, green for bank and building societies, yellow for pensions and life policies. Then whenever you want to check out your investments, everything should be clear and in order. Always keep copies of letters you send to the organisations which look after your investments, and make a note of any telephone conversations and the date.
Another good way to keep track of your investments is to assemble them on a computer spreadsheet program like Excel. You can set up your holdings of share or units with the number you have and then by re-inputting the price from the newspapers from time to time, you can re-value your portfolio. You can also assemble your portfolio at one or more sites on the Internet.
Sending cheques through the post
If you send large sums of money through the post, there is a chance that someone will steal the cheque and pay it into another account. To protect yourself you should use cheques which are crossed and have the words A/C Payee written within the crossing. This stops the cheque being signed over to someone else's account. UK cheque books usually have these printed automatically but if not, you can add two lines across the middle of the cheque and write in A/C Payee yourself.
When you send a cheque through the post to a bank or building society for the credit of your own account, you should make the cheque payable to yourself and to add your account number. For instance Pay J R Williams A/C No 4577762.
 Last updated 10 December 2009 |
Part 1 Contents | Next chapter |
| Shares A Beginners Guide to Making Money | The Money Code |
| If there's anything you think should be included or you don't understand. send us a message |