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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.
If you are mainly concerned about a run on your bank, take a look below at Compensation Funds. Also do you have money deposited with your stockbroker, investment adviser or solicitor? These will also be invested in banks but as you are not invested directly you are unlikely to be covered by any compensation scheme.
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. Many banks now will not let you have the money back early even if you are willing to pay 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. Company accounts are not covered. In many juristrictions, accounts in any currency are covered.
Banks and building societies which are licensed by the Financial Services Authority are now covered by a compensation scheme for 100% of up to £85,000 per person for all accounts in each bank or building society. So for a joint account with two investors the limit is £170,000 and for four people holding an account, £340,000.
This compensation scheme includes deposits in a Cash ISA . Click for the Financial Services Compensation Scheme (FSCS).
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.
Some banks and building socities which have been taken over by other banks and building societies may or may not be covered by one limit - this is only a problem if you have deposits in both which jointly exceed the limit, see this useful article 'Savings compensation: Bank ownership' at This is Money.
Bank accounts situated abroad are not covered by the UK deposit compensation scheme but by a compensation fund in their own country.
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.
Euro zone banks are covered by compensation of €100,000 (about £85,000) for each depositer (ie €200,000 for a joint account or €400,000 where an account is in four names), see French deposit guarantee fund. . For the latest exchange rates click here.
If you open an account at a bank in the USA you are covered for 100% of up to US$250,000 per person (i.e. US$500,000 on a joint account or US$1,000,000 where an account is in four names) if the bank belongs to the Federal Deposit Insurance Corporation. If you want a cheque book with an account denominated in US$, you have to have an account in the US. There is also temporary unlimited coverage for non -interest bearing accounts.
Some countries, including Canada, do not allow non-residents to hold bank accounts unless they are about to emigrate there.
Offshore banks Branches of UK and European Economic Area banks in Guernsey, Jersey, Alderney, the Isle of Man, Gibraltar and Bermuda are not be covered by either UK or European compensation schemes but have their own, generally with a maximum compensation per person of £50,000 per banking group and subject to a maximum pay-out in total. Some cover Trust accounts, some do not and if you invest for a child (also a type of Trust account) the money may or may not be covered according to the juristriction.
UK authorised insurance companieshave the best protection for life and pensions policies. The Financial Services Compensation Scheme gives 100% on the first £85,000. 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 even though there may be local schemes.
UK authorised unit trusts and OEICs, ISAs (other than Cash ISAs), Personal Equity Plans, Friendly societies. The Financial Services Compensation Scheme covers each investor for 100% of losses up to £85,000. 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. Nowadays they rarely seek funds from the public.
Department for National Savings is a government department and is presumed to have a government guarantee.
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 which may or may not have 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. You will always be better off investing in a UK authorised scheme.
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 £20,000 and you are a basic rate taxpayer. For your emergency fund put £10,000 into a Bank or Building Society On Line Deposit Account or Bank or Building Society Instant Access Account or Bank or Building Society Postal Account or .
You now have £10,000 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 £10,000 tranche of your money, make sure you can get it back no later than one or two years. The remainder, if you have any more, might be tied up for, longer but there is a possibility of interest rises, so holding more money immediately available may be a better bet - and also if you are working and there is a possibility of losing your job.
Only if you have considerable assets and no risk of unemployment should you consider risky and potentially 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 6 January 2012 |
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