We will start this section by stating that when considering investing your money it should always be for the long term, which means at least 5 years. If you want your money to be safe and you do not want to see it ever fall in value then you should find a high interest Bank Account to use. Investments will fall in value and they will rise in value. Past performance is no guarantee of future performance. If you have a lump sum of money to invest, it would be wise to first of all consider if there may be a need for some or all of the money in the near future, or if there are debts to be paid. If so, then it makes sense to only invest the amount of money you can afford to put away for a few years. Once you have decided that you are happy to proceed then together we will determine your Attitude to Risk, which will then guide us as to which Provider should be used and the type of funds to be invested in.
Individual Circumstances
One of our key roles in assisting a client is to help them plan and understand what risk they are prepared, and can afford to take. Whilst the majority of individuals would like more money, most people tend to achieve a lifestyle they are comfortable with at some point. When this point is reached, usually in their late 50’s or early 60’s, the amount of money available and the length of time to invest needs to be carefully considered.
Another aspect where financial planners play a key role is in the construction of portfolios in terms of asset classes. Diversification being the key element to most portfolio construction when investing for the long term. The mistake for most people would be to invest their money in only one fund, or one type of stocks and shares. For example it makes sense to hold fixed income investments in an ISA rather than in its own name, as 20% income tax on the interest is reclaimed. Many people tend to hold their equity style investments in these wrappers to take advantage of the capital gains tax CGT) allowance, but never use their annual CGT limit of £9,600 (current tax year 2008/09), a married couple therefore, could realise up to £19,200 of investment gains every year without paying tax. Few people ever do this. It is normally only a financial planner who has an overall view on all of a client’s assets who is in a position to give this type of advice.
Why Invest at all?
This is a very good question. Should a couple with a large mortgage, who suddenly inherit a lump sum of money, invest for the long term or, pay off their mortgage to reduce their debt burden? Does it make sense for a 75 year old to invest for the long term when his/her capital and any investment gains that are made will be taxed at 40% on death?
Does Investment pay?
Once we have ascertained whether or not a client should have an investment portfolio, the question facing most advisers is "which way is the market heading – up or down", the other point to consider would be "is now the right time to invest"? Whilst we all have our opinions on this matter, who actually knows? Our belief is that there is never a right or wrong time to invest. At certain times (right now for instance – 29/10/2008) the markets have fallen dramatically from just 12 months ago, therefore logic would dictate that sooner or later the markets will start to climb, will it be in twelve months time or two years, who knows, who has a crystal ball that works? Diversification and investing for the long term helps to take the guessing out of the equation!
This basic belief is shown by the following figures which come from the 53rd Edition of Barclays Equity – Gilt Study 2008 which shows that, over the last 105 years, UK Equity returns have averaged 5.3% over inflation. This compares to a return for Gilts over the same period of 1.1% over inflation and only 1% over inflation for Cash?
The table below from the same study shows the same picture more clearly. Over the longer term Equities outperformed other asset classes, even when taking into account major market corrections such as those that occurred in the years 1973-1974, 1989-1992 and 2001-2003.
Money invested in |
Initial value in Dec 1899 |
Value in Dec 2004 |
Dec 2004 value in real terms |
Cash |
£100 |
£16,211 |
£227 |
Gilts |
£100 |
£18,598 |
£318 |
Equities |
£100 |
£1,103,688 |
£18,875 |
Therefore as you can see, long term investing in Equities has always produced a higher return than investing in Gilts or Cash in the long term.
Types of Investments, a Basic View
ISA's
Each tax year you can invest up to the annual allowance in a Cash ISA, or an Equity ISA or a combination of both. Current limits for this tax year (2008/09) are £3,600 in a Cash ISA, and up to £7,200 in an Equity ISA. Any amount invested in a Cash ISA must be deducted from the Equity ISA allowance if you should invest in both types. Therefore, if you invest £2,000 into a Cash ISA, you could then only invest £5,200 into an Equity ISA in the same tax year.
Both types of ISA are free from income and capital gains tax however, on death the tax free status is lost, forming part of the deceased’s estate which could well be charged with Inheritance Tax on any amount over the Nil Rate Band. Also, the ISA allowance is not transferable to another person.
Investment Bonds
Usually the minimum invest must be £5,000. A range of funds should be chosen for the investment. Penalties normally apply in the first 5 years if you should need your money back, Bonds should always be regarded as “long term investments”. The fund managers pay basic rate tax, therefore on surrender in the future, after “top-slicing” the gain when added to your other income, may or may not result in a further tax charge. As this is something that has to be calculated for each person on an individual basis, we will not expand any further at this point. Furthermore, a Bond in joint names would further reduce liability to income tax.
OEIC's and Unit Trust's
Similar to Investment Bonds, normally the investment would suffer a 3% or 5% initial charge; however, this means there are no penalties applicable at any time. On surrender any gain can normally be offset against your annual capital gains allowance, although this allowance cannot be carried forward. This would therefore mean that the growth from a Unit Trust or OEIC should be partially surrendered each year if possible.
Why use Warwick Wright Financial Services?
- The process we use does help us to ensure investors are taking the appropriate level of risk to suit their objectives and circumstances. We feel that while investing can be exciting it should always be kept simple and not unnecessarily confusing. Our aim is to make sure that you know and understand the risks and costs involved, without confusing you with ‘jargon’.
- We have a well thought out, consistent and unbiased strategy that puts your interest first.
- We will help you decide whether investing is right and appropriate for you. Investing is just one part of financial planning and we will use our expertise and efforts to the areas most important and relevant to you.
- We can advise on your portfolio in a disciplined manner and help in all areas of your personal financial planning not just your investments.
- We always give personalised advice that takes into account your tax position. We never offer a “one size fits all” solution.
- You will always receive truly honest and professional advice, and if we feel you should not be investing, we will tell you so!
- We offer a separate service where we can value your investments on a weekly or monthly basis (small fee applies) and rebalance your portfolio as needs dictate.
Note -
Levels, basis of, and relief’s from taxation are subject to change. The views we have given are based on our understanding of current tax law, which is subject to change at any time. Remember that Investments can go down as well as up and past performance is no guarantee of future performance. Tax planning is not regulated by the FSA.
How to Apply
We can if you like discuss your existing investments in more detail, for instance are you invested in the right funds, do your existing funds match your attitude to risk, what is your investment strategy, and do you have enough diversification in your portfolio. Does your portfolio need rebalancing, for instance, are you mostly invested in Equities or Gilts or Bonds or a spread of all of them. Are you in high risk funds when perhaps you should be in medium risk funds or even in low risk funds. Are you investing for the long term, or are you investing for the medium term. Would you like some investment income to support your pension income and/or lifestyle?
If you have money to invest we can also help. To do this we will take into account your attitude to risk, how much you want to invest and how long you want to invest for, i.e. the short term 0 – 5 years, the medium term 5 – 10 years, or the long term 10 years plus. Once we have determined the right Company to invest with, we will then determine a range of funds to use usually a mix of equities, gilts, bonds, cash and property, again within your attitude to risk. Please note that we also give advice on the arrangement of Unit Trusts, ISA’s, OEIC’s and also tax planning for high rate tax payers.
Apply by completing the form on this webpage, or if you prefer, you can call or email us for an initial free no obligation chat to discuss the best way forward for your requirements.
Keywords: Investments, investment funds, investment strategy, investment analysis, equity fund, unit trusts, investment advices, investment quote
