Investments
Why Invest
OEICs
Investment Trusts
Investing is not just for the wealthy. With even modest savings you can invest your money to work harder on your behalf, to pay for that special trip, a child’s wedding or even for retirement.
There are many choices available and we will aim to guide you through the investment process, taking special note of:
- Your need for access.
- Your attitude to risk.
- The length of time you wish to invest.
- Your individual tax position.
- Current legislation.
We will also ensure that you are able to track the performance of your investments and we will undertake regular reviews to make sure that the investment is still right for you, and make changes where necessary.
Within all investment literature, great emphasis is made on the need to establish a clients “attitude to risk” in relation to a particular savings or investment attitude. This is fine as long as regular reviews take place in order to establish that the “chosen” investment remains appropriate over the years. This is where working alongside Harris & Associates can help.
ISA Investments
The ISA (Individual Savings Account) allowance for the tax year 2010/11 is now £10,200. This allowance can be invested fully into "stocks and shares" known as an Equity ISA, or split into two separate elements, Equity and Cash. As of 6th April 2010 up to £5,100 can be invested into a Cash ISA with the remaining paid into the Equity element.
Cash ISA is a tax free account which can be instant access but still give tax free interest. These “investments” are usually made via a Bank or Building society of your choice and if you are saving for something shorter term this is an excellent return so why not take advantage of it?
The Equity version of the ISA allowance is often made via a Life Assurance company or an Investment House and choosing the right way for you to invest is important. Many people have ISA’s that have been built up over many years without a structured approach. You are able to move ISA’s between providers ensuring that you can continue to achieve good value for money and also invest in a way that meets your needs.
As a complement to existing or indeed new Pension arrangements for retirement the ISA allowance should not be overlooked due to its extreme flexibility and accessibility.
There is no specific investment or saving term, they are open ended however, the equity element is normally a medium to long-term investment. Regular savings can usually be stopped or reduced with no disadvantage. Within overall Government limits you can invest additional amounts at any time throughout the tax year. You can dictate the level of income or lump sum withdrawals at any time throughout the tax year.
Tax rules may change, the value of any tax relief depends on the financial circumstance of the investor.
The value of an investment is not guaranteed and can go up and down depending on investment performance. You could get back less than you have paid in.
NOTE.
Equity ISA’s can be invested solely into “individual shares” within an ISA wrapper or as part of a “collective investment” where the core investment is a Unit Trust, OEIC or Investment Trust.
Most Unit trusts are currently being converted to Open Ended Investment Companies which are generally referred to as OEIC’s.
Please be aware that these “guidance notes” have been kept as short as possible and are meant purely as an introduction to investments. Harris & Associates would advise anyone considering investing capital, as a single lump sum or on a regular basis to seek professional and qualified advice from one of our advisers.
What is an OEIC?
Open-Ended Investment Companies (OEICs) are collective investment schemes. They allow individual investors to enjoy the benefits usually only available to larger institutional investors, by pooling their investments together in a common fund.
OEICs are incorporated companies which issue shares which investors can buy and sell. The shares in an OEIC are traded on a single pricing basis, unlike unit trusts which have a bid-offer spread.
An alternative name used to describe an OEIC is an Investment Company with Variable Capital (ICVC).
Within an OEIC you can invest in a range of funds, investing in different markets such as equities, government stocks, bonds and cash, like unit trusts.
An OEIC will diversify its investments and therefore spread the risk to an extent that would not normally be possible for an individual making direct investments. The level of risk associated with an OEIC depends on what you invest into and certain share classes will fall into the low or high risk categories. OEICs should be viewed as a medium to long term investment.
OEICs are able to operate as “umbrella” structures with several funds within one company. This enables funds to be structured more efficiently and for investors to customise and control their investments more easily. Depending on the prodivder, shareholders can switch between funds without triggering the entry or exit charges which would arise if the investor wanted to move from one OEIC to another.
The value of an investment is not guaranteed and can go up and down depending on investment performance. You could get back less than you have paid in.
What is an Investment trust?
Investment trusts are public limited companies whose only purpose is to invest in assets across a diversified portfolio of shares and securities which are selected and managed by an independant board of directors with resonsiblilty delegated to professional fund managers in order to make a profit for its shareholders.
Investment trusts can generally:
- Invest in any kind of company, whether its shares are quoted on a stock exchange or it is an unquoted private company.
- Provide venture capital to new firms or firms which want to expand.
- Invest in any country throughout the world.
Investment trusts have a fixed amount of money under management and this is issued as a fixed number of shares, hence the description "closed ended". One of the advantages of this fixed capital structure is that managers can take a long term view with their investments and do not fall prey to violent swings in investor sentiment which can happen at inopportune times e.g. when a large number of investors suddenly decide they want to withdraw their money (which unfortunately can be a problem that unit trust managers face)
Capital structure
Investment trusts are generally divided into two types – conventional and split capital which reflects differences in their capital structures. Conventional Trusts have a simple share structure consisting of ordinary shares, though they may also have loan stock or preference shares. The majority of conventional trusts have an indefinite term and some are now over 100 years old, but some of the newer conventional trusts now start off with limited lives of say five or ten years, after which shareholders are asked to vote on whether to continue the life of the trust.
Split Capital Trusts
have one portfolio of investments as do conventional investment trusts but, by issuing more than one type of share, they are able to meet the differing needs of a range of investors. Split capital trusts have a limited life with a fixed winding up date when the assets are due to be paid back to the shareholders.
The different classes of share in a split capital trust are ranked in order of priority. If, in addition the trust has debt, debentures or loan stock, these are ranked first before the shareholders to be repaid in a winding up. Each share class then follows in a particular order. In other words, for every split capital trust there is a predetermined sequence in which the various classes of shares are repaid.
The value of an investment is not guaranteed and can go up and down depending on investment performance. You could get back less than you have paid in.
Investment Bonds
An investment bond can be linked to an investment fund on a unit linked or With Profits basis but the workings of both are generally the same.
Bonds can be set up on a single life, or joint life basis.
Within an Inheritance tax (IHT) mitigation strategy, they can be set up in Trust for the benefit of children
Regular withdrawals can be taken from the investment at outset or whenever appropriate but an investor should be aware that if monies are withdrawn at a faster rate than your investment grows, the value of the investment will reduce.
The investment pays basic rate tax within the fund and as such there is no further liability to tax for a basic rate tax payer. If income or withdrawals exceed an amount in excess 5% per annum of the original invested capital there may be a further tax liability to higher rate tax payers.
On death the value of the fund is commonly enhanced by 1% and a With Profits investment may well benefit from a “terminal bonus” although this is not guaranteed.
Early surrender penalties are now common for the initial five year period and for this reason this investment should be viewed as a five year minimum investment.
In the past there was an initial charge made when making this type of investment but gradually some companies have removed this charge with a slight increase in the annual management charge to reflect this and pay for the initial set up costs.
AMC charges range from 1% to 2% dependent on the investment selected and this type of investment allows you the opportunity to create an “investment portfolio” that suits your individual situation and reflect your opinion as to which areas of investment will perform the best.
Most bonds allow you to switch between funds at no cost in order that your investment can continue to reflect your investment attitude or indeed your changing priorities as you get older.
Trusts
Most providers allow their bonds to be “placed” into trust with the completion of a simple trust form issued to you by the Company.
This is particularly useful in that you can invest into a bond, in your own name and for your own use now, and at a later date place the investment into the protective wrapper of a trust – as a gift for IHT purposes - at no additional cost.
The value of an investment is not guaranteed and can go up and down depending on investment performance. You could get back less than you have paid in.
Regular Savings
Within certain minimum investment criteria, all of the investments we have noted can also be used to save on a regular basis and this method of savings will benefit from “Pound Cost Averaging” in that they are purchasing shares/ units each month as opposed to on a particular day.
In this way investors could benefit from dips in the markets as the investment buys more shares/units when the market is under performing, which will then have a greater value as the markets and the underlying investments rise. Of course you will also buy fewer shares/units when prices rise.
Depending on your financial position and capital available it may well be that a combination of lump sum and regular investment is appropriate.
The value of an investment is not guaranteed and can go up and down depending on investment performance. You could get back less than you have paid in.