investments

The following is a list of investment vehicles complete with a full explanation of each type.

Investment vehicles:

- Shares

- Unit Trusts

- Investment Trusts

- Personal Equity Plans

- TESSAs

- GILTS

- Corporate Bonds

- Tax Free Friendly Society Saving Plans

- Investment Bonds

- ISA

- OEICs - open ended investment companies

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The shares of quoted companies provide a popular method of participating in the growth of individual companies and the growth of the economy in general.In addition, most shares provide an income by way of quarterly, half-yearly or annual dividends.

While the number of shareholders has grown in the last 20 years as the result of the privatisation of national and regional utilities and the conversion of building societies and mutual insurance companies into public companies, investors must always be aware that share prices are subject to a wide range of factors which may cause them to fall.

Equity shareholders must accept the volatility associated with the potential for growth and take an appropriately long-term view.

Tax – Dividend income subject to Income tax, share sales to Capital Gains Tax.

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A unit trust is constituted by a trust deed which is in agreement between the trustees and the managers of the fund. The trust deed covers the main aspects of the running of the trust and is subject to approval by the Financial Services Authority (FSA).

The essential characteristics of the deed are that it lays down:

- the rights and responsibilities of all concerned;

- provisions enabling new investors to join;

- the maximum charges that can be made by the managers for administering the fund;

- provision for calculating the buying (offer) and selling (bid) prices of units;

- the objectives of the trust; and

- types of investment permitted.

The role of the trustee, whose appointment is subject to approval by the FSA, is that of a watchdog. A trustee’s main duties are to ensure that the terms of the trust deed are strictly observed and to hold the cash and securities belonging to the fund. The responsibility for the choice of investments lies with the managers, although the trustee retains the right to veto.

If a unit trust or OEIC manager:

- goes out of business and cannot return investors’ money; or

- manages a fund negligently, so that investors lose money,

investors can lodge a claim with the Financial Services Compensation Scheme. The maximum compensation the Scheme will pay is £48,000 – 100% of the first £30,000 plus 90% of the next £20,000.

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Investment Trusts are companies that invest in the shares of other companies.

They pool investors’ money and employ a professional fund manager to invest in the shares of a wider range of companies than most people could practically invest in themselves. This way even people with small amounts of money can gain exposure to a diversified and professionally run portfolio of shares, spreading the risk of stock market investment.

There are over 300 investment trusts responsible for the management of billions of pounds’ worth of assets on behalf of investors.

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In order to promote individual share ownership and to give investors a personal interest and a direct stake in UK companies, personal equity plans (PEPs) were introduced with effect from 1 January 1987.

Substantial improvements to PEPs were made in subsequent Financial Acts, and from 1 January 1992, investors could take out a ‘single company’ PEP, in addition to a general PEP, in each tax year. The last subscriptions to PEPs were paid on 5 April 1999; they were succeeded by Individual Savings Accounts (ISAs), but plans in existence on that date continue. PEPs have automatically been transferred to an ISA from the 5th April 08.

Main Features of PEPs
The main features of PEPs were as follows.

(a) Any UK resident aged 18 or over was able to invest up to £6,000 per annum in a general PEP and £3,000 in a single company PEP. Subscriptions had to be paid by cheque; shares could be transferred into a PEP only in the following circumstances , and subject to time limits:

1. shares newly issued in a public offer;
2. shares allotted under a savings-related share option scheme or an approved profit- sharing scheme into a single company PEP; and
3. shares issued to members on the demutualisation of a building society or life assurance company.

In the first two cases, the cost or value of the shares counted towards the annual subscription limit. In the third case, the shares were treated as having a ‘nil’ value, and so did not count towards the limit.

(b) Authorised PEP managers included members of the stock exchange, licensed security dealers, banks, building societies and unit and investment trust managers. Some companies offered plans invested only in their own shares (corporate PEPs); these could have been either general or single company plans.

(c) No tax was payable either on capital gains or income, whether paid out or reinvested, in respect of investments held within a PEP or on withdrawals of capital. However, interest arising from cash holdings was subject to savings rate tax in the same way as a bank or building society deposits if the amount paid to the investor exceeds £180 in any tax year.

(d) As mentioned, investments which were held in a PEP are now automatically transferred to an ISA from the 5th April 08.

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They are now closed, but you have the ability at maturity to ‘roll over’ the original investment into a TOISA, but you keep the tax free growth and the capital does not affect your ISA allowance. Do not surrender your Tessa, unless you want all the money. For further information see ‘ISA’.

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Government Stocks/GILTS are loans made to the Government in order to fund its spending. They comprise most of the National Debt. A GILT is issued for a given redemption value at a fixed date in the future, and provides the holder with interest payments until that time.

The value of the GILT depends upon the outlook for inflation and interest rates. (Inflation eats away at the true value of the redemption capital, while interest rates make the interest payment seem more or less attractive).

If interest rates are expected to rise then the value of the gilt will fall, and when rates are going down gilts rise.

Most people should not buy GILTS themselves unless it happens to fit a specific purpose, but will encounter them within other investments where the managers use them to spread risk, produce income etc.

If however you do want to buy one go to the Post Office and avoid dealing costs, and also get the interest paid gross, (though taxable).

If you doubt the inflation beating prowess of the Government (whether in or out of EC single currency), go for Index Linked issues.

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Corporate Bonds are the corporate equivalent of gilts, and work in the same fashion. Corporate Bonds are issued by the multinationals who find such borrowing cheaper than bank loans.

The returns from the Corporate Bonds are often better than gilts because the risk of a bankruptcy of a company is greater than that of a country failing to repay.

Corporate Bonds are not normally an investment for the individual, but one for the fund managers. Corporate Bonds are sometimes used in income producing investments.

Corporate Bonds can be used in ISAs and PEPs. The chief advantage of corporate bonds in ISAs lies in their low tax income generation.

Corporate Bond prices will tend to rise when inflation falls, or interest rates fall, or a previously shunned company comes back into favour. They will fall when the outlook for inflation is poor, interest rates rise or a company gets into trouble.

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Mainly known for their Tax Free Savings Plans, they have an interesting history and background.

These are regular monthly savings plans.

- You save for a period of 10 years, though children’s plans may be longer.

- Maximum investment £25pm or £270pa.

- Anyone can invest, both taxpayers, non taxpayers and children.

- Children’s plans are written to age 18 (and may therefore exceed 10 years at outset).

- Growth is tax exempt.

- Maturity is tax exempt.

- Investment profile tends to be conservative – a managed fund or with profits approach.

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An Investment bond is a non-qualifying single premium life assurance policy. The investments of the bond fund form part of the main assets of the life assurance company and the bondholder has no prior charge on the fund.

Consequently, if the life assurance company should find itself in financial trouble, the bondholder could suffer loss on his investment. The compensation payable by the Financial Services Compensation Scheme is 100% of the first £2,000 plus 90% of the value of the policy over £2,000. It is mainly for this reason that great care should be taken before business be placed with new or small life companies.

In the case of unit trusts, there is not the same risk in dealing with newly established or small trusts due to the security provided by the trust deed and the fact that only the unitholders have a claim on the fund. With most life companies, the investments are in a separate bond fund which operates similarly to a unit trusts.

The performance is a function of the underlying value of the investments in the fund, irrespective of the performance of the life company’s other investments. Many bond funds themselves invest in unit trusts as well as directly in equities and other assets.

Investment Bonds enable individual investors to pool their resources, providing the following advantages when compared to investing directly in stock exchange securities.

- Full – time professional management is available on a day-to-day basis. However, the investment expertise of fund managers varies considerably and this is likely to be reflected in the results of their portfolios.

- As a result of the wide investment spread, the impact of disappointing results from individual investments is reduced. In addition, a spread of management can be obtained by investing in a number of different unit trusts or bonds, thereby further reducing risk. However, the likelihood of making exceptional gains is also reduced.

- Holders of investment bonds are permitted to withdraw 5% of their initial investment each year with the income tax liability deferred until disposal.

- Investment bonds provide a convenient method of investing in assets such as property, particularly for relatively small amounts (a few property unit trusts are now also available).

- Investment bonds provide an easy and convenient way of investing in overseas equities and fixed-interest securities. This method is often adapted by stockbrokers to obtain the required overseas exposure for their private clients.

- Investment bonds generally provide a switching facility between funds at very low cost with no tax being payable by the bondholder on the exercise of this facility.

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Like PEPs, ISAs are governed by their own regulations. The main features are as follows.

- Any UK resident aged 18 or over is able to invest up to £7,200 in each tax year. Those aged 16 and 17 may open an ISA Cash Account.
Accounts may not be opened in joint names but, in the case of married couples, both husband and wife may have independent accounts.
Subscriptions may be paid by cheque or electronically and applications can have effect for successive years. The only shares which may be transferred into an ISA are those allotted under a savings-related share option scheme or an approved profit sharing scheme. The transfer must take place within 90 days of their transfer to the investor.

- An ISA may consist of up to two components:

1. a cash component, with a subscription limit of £3,600 each year;
2. a stocks and shares component, with a subscription limit of £7,200, less amounts paid to the other Cash components in that year. For example, say £2,700 was invested in Cash a further £4,500 could be invested in Stocks and Shares.

The ISA elements are now known as 'Cash Account’ and 'Stocks and Shares Account’ from 6th of April 2008. An investor may open only one Cash-ISA & 'Stocks and Shares ISA each year. Each component may, however, exist separately and an investor may use the products of different providers for each one in each year.

- Additionally, an investor may hold a ‘TESSA-only’ ISA or TOISA, that is, one which has had paid into it the capital element of a matured TESSA (i.e. a maximum of £9,000). The transfer from the TESSA must take place within six months of the maturity date.

Alternatively, the investor may transfer the capital element of his matured TESSA to the cash component of an ISA. The amount transferred does not count towards the subscription limit.

- ISAs will continue to be available until 5 April 2009.

- No tax is payable either on capital gains or income, whether paid out or reinvested, in respect of investments within an ISA, or on withdrawals of capital, with one exception.

Interest on cash held within the stocks and shares or insurance component of a maxi-ISA is paid, subject to the deduction of income tax at 20%, but the interest is otherwise tax exempt and does not have to be reported on the investor’s tax return.

Tax credits on dividends are no longer recoverable by the account manager for the benefit of investors in the stocks and shares components. Tax deducted from interest will be repayable throughout.

- There is no minimum period of ownership required to retain the tax reliefs. Capital and income can be withdrawn at any time, but the account provider may impose charges on withdrawals or on transfers to other managers.

Charges must be clearly disclosed and may include one or more of an initial fee, annual charges for both first and subsequent years, dealing costs, charges on the number of assets held, withdrawal from the plan (including switching to another plan manager), receiving the annual report and accounts and attendance at annual general meetings of companies whose shares are held, and other sundry expenses mainly covering portfolio valuations additional to the first in a year.

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Open ended investment companies (OEICs)
Open ended investment companies (OEICs) became available in the UK in January 1997. They are, effectively, unit trusts established as companies incorporated under UK and European legislation and so comply with the rules of the UCITS.

Instead of trustees, they have a board of directors, one of whom will be the ‘authorised corporate director’ who will be the fund manager. They also have a single price for their shares, based, as with unit trusts, on the value of their underlying investments.

They are, in this respect, simpler than unit trusts (which have separate prices for purchases and sales), although they may impose separate buying or selling charges to prevent dilution of the fund.

This ‘dilution levy’ is designed to protect investors in the fund from the costs incurred on the acquisition or disposal of investments as the result of significant additions to or withdrawals from the fund. OEICs may be constituted as umbrella funds, with different classes of share for different sector or regional funds; they may also issue different types of share.

A number of unit trust groups have converted their funds to OEICs and this trend is likely to continue.

Tax –The managers can buy and sell within the trust without paying tax. Dividends are under Income Tax, gains/losses on sales under Capital Gains Tax.

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