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www.InvestmentGuide.co.uk However much money you have, you want to make the most of it. But making the most of your money does not mean ploughing it all into one investment. You need different investments to suit different needs.
Emergency fund
This is the first purpose of having any investment: a sum of money which you can get at immediately without any penalty if something unexpected happens. For people who have little money, an emergency fund may be their only form of investment.
How much you should have in an emergency fund depends on how worried you are about an emergency. People do fall ill, have accidents, lose their jobs or have to carry out major repairs on their homes. It makes life much easier if you have ready cash to pay for some or all of these things should they occur.
A fund of £2,000 might do for a young single person. A married couple with children might aim for £5,000. If you are more cautious your emergency fund might be as high as £10,000 or £20,000. The higher your income and expenditure, the higher emergency fund you are likely to need as you will not only use it for emergencies but also to help pay for larger items of spending (say holidays or house repairs). People with jobs might think in terms of three months' pay.
An emergency fund of £3,000 per couple will not affect your right to state means tested Family Credit, Income Support, Council Tax Benefit or Housing Benefit. Investments of between £3,000 and £8,000 (£16,000 for Housing Benefit, Council Tax Benefit and Income Support paid to people who are permanent residents of Care/Nursing Homes) will reduce the state benefits but not eliminate them. Each child has a £3,000 limit of its own.
However, there is no need to have the rest of your money readily available. If you are particularly worried about running out of funds, you should tie up as much as you can spare so that it becomes available at regular intervals, say, every year or every two years. Then every year or two, you should check whether your emergency fund is large enough and if necessary replenish it. If you have no savings, it's worth making a commitment to invest so much each month by a method which does not tie up your money for too long, in order to build up an emergency fund for the future.
Don't tie up your money for too long
Time may pass quickly. But when you find you are short of money or interest rates have changed, time can pass all too slowly for you. So unless you have a great deal of money, don't tie up your money for too long; you are quite likely to want it back early. Getting back a long term investment early usually makes it worse value than having left the money immediately available all the time.
Also be warned against tying up your money at a fixed rate of interest. If meanwhile other rates rise and offer a better return, you may then find yourself lured into changing your plans and suffer a penalty.
Compensation funds
Even if you invest in a way where your capital does not fluctuate in value, there is always a chance that the body you are investing in will go bust. It may be rare but it should not be forgotten. With some forms of investment there are compensation funds designed to refund some of your money if this happens.
Banks and building societies which are licensed by the Financial Services Authority since 1 October 2007 are covered by a compensation scheme for 100% of £35,000 per person for all accounts in each bank or building society. The Government has announced it plans to raise the limit to £100,000 per person but this has not yet come into effect except for deposits with the Northern Rock Bank which are curremty guaranteed without limit by the UK Government; the terms of this guarantee could change if the Northern Rock is taken over.
Previously the maximum pay-out was £31,700 per person (100% of £2,000 and 90% of £33,000). So for a joint account with two investors the limit is £70,000 compared. Deposits for an original term of over 5 years and in European Union member currencies and the Euro are also included but US$ deposits are not. This compensation scheme includes deposits in a Mini Cash ISA and a TESSA. Click for the Financial Services Compensation Scheme (FSCS) web site if you are on-line.
It may not always be obvious whether a bank is licensed by the Financial Services Authority, especially when an 0800 or 0500 free phone number can go straight to a bank situated abroad. Banks from countries within the European Economic Area (the European Union and a few other countries) Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Liechtenstein, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden can operate or solicit deposits in the UK under licencing provisions of their own country. Since 1 May 2004 the following countries have joined the European Union: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia. Since 1 January 2007 Bulgaria and Romania have also joined.
Bank accounts situated abroad are not covered by the UK deposit compensation scheme but by a compensation fund in their own country which is 90% of a maximum of €22,222 (Euros) per account holder which is about £15,500. Compensation schemes in some Euro countries, notably France, are higher than in the UK and others, notably Ireland, are lower. A list of the rules for each country are held by the European Union. It is not known whether the newly joined countries all have compensation schemes yet.
The Financial Services Authority keeps a list of European Economic Area banks entitled to accept deposits from the UK. See also offshore banks below for compensation for deposits in banks outside the European Economic Area.
Offshore banks with branches in the European Economic Area are described above. Branches of UK and European Economic Area banks in Guernsey, Jersey, Alderney, the Isle of Man, Gibraltar, Monaco and Malta may not be covered by either UK or European compensation schemes. Some juristrictions have their own schemes but apart from banks in the USA, these offer far less protection than in the UK.
UK authorised insurance companieshave the best protection for life and pensions policies. The Financial Services Compensation Scheme gives 100% on the first £2,000 and 90% on the rest. Overseas insurance companies (Isle of Man, Jersey, Guernsey and Gibraltar count as overseas) not authorised by the Department of Trade must say they are not authorised in any advertisement or circular; don't invest in them.
UK authorised unit trusts and OEICs, ISAs (other than Mini Cash ISAs), Personal Equity Plans, Friendly societies. The Financial Services Compensation Scheme covers each investor for 100% of losses up to £30,000 and for 90% of the next £20,000 making a maximum payment of £48,000. This applies to investments made no earlier than 18 December 1986. There is no compensation for a fall in unit or share prices, only if there is a loss due to mismanagement or fraud by the managers. This scheme covers a number of different types of investments listed below:
Local authorities don't have a formal compensation scheme but the Government would probably stand behind any authority liable to default on its loans.
Department for National Savings is a government department and is presumed to have a government guarantee. With the present uncertainty over the banking sector, National Savings is an obvious home for thr money of risk averse people.
Financial advisers Most are covered by The Financial Services Compensation Scheme. For more on advisers, and significantly higher limits for solicitors, see Best Advice and How to Get It.
Offshore funds Where a fund is located abroad and the fund is recognised by the Financial Services Authority, there are compensation funds with similar limits to the UK compensation for unit trusts and OEICs. However some offshore funds specifically state they are not covered by a compensation scheme and others have asked investors to authorise withdrawal from being recognised: that should be the time to sell.
So for a £100,000 investment, in Guernsey the maximum payment would be £60,000 whereas in the UK it would be £48,000. But for £30,000, in the UK, Isle of Man and Jersey the compensation would be £30,000, whereas in Guernsey it would be £27,000. Not all funds in these territories are recognised.
All funds mentioned in this book were recognised at the time the book went to press. The Financial Times lists recognised funds in its prices page and these funds are allowed to be promoted in the same way as UK based unit trusts.
A longer term strategy
If you really want to tie up your money, don't put all your eggs in one basket. Suppose you have £16,000 and you are a basic rate taxpayer. For your emergency fund put £5,000 into a Bank and Building Society On Line Deposit Account or Bank and Building Society Instant Access Account or Bank and Building Society Postal Account or .
You now have £11,000 to invest. You may be tempted to tie this up for 5 years or even longer - don't. An emergency fund must be available to be spent. Once you have spent it, you will need another.
So wherever you invest the next £5,000 tranche of your money, make sure you can get it back after two years. The remainder might be tied up for, say, 4 to 5 years although when there is a possibility of interest rises, holding more money immediately available may be a better bet.
Only the remaining £6,000 could be put into long-term investments like Investment Trust Maxi ISA, or Unit Trust or OEIC Maxi ISA or Unit Trust or OEIC Index Tracker.
Other long term investments include different types of Unit Trusts or OEICs, Investment Trusts and Shares. For the more cautious there is Government Index-Linked Stockor US Government Inflation-Indexed or Inflation-Indexed OATi and OAT€i French Government Stock .
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updated 15 December 2007. |
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