OK so your starting to get
a bit of money together and want to know the best ways for
you to invest it.
A-Z FOR THE INEXPERIENCED
Interested in ISAs? Pondering
pension possibilities? Here is a guide to the ins and outs
Annuity: An insurance company
investment that pays out a guaranteed income. The law requires
you to buy a "compulsory purchase" annuity with the bulk
of your pension fund when you retire to give a taxed income
for the rest of your life.
Blue chips: Shares in companies
that are perceived as being the most solid and reliable
in the market. There is no definitive list. Some say most
of the companies in the FTSE 100 index of leading shares
are blue chips, others stick to the FTSE 30.
Corporate bonds: Loan stock
or IOUs issued by companies that want to raise capital.
The company promises to pay a certain amount of interest
on a set date every year until the redemption date, when
it repays the loan. Most fund management companies offer
corporate-bond Peps, for investors needing an income.
Income Tax: Tax charged on
any income earned and above your personal allowance (£4,195
for the 1998-99 tax year). The first £4,300 of taxable
earnings incurs 20 per cent tax, from £4,301 to £27,100,
23 per cent, and over £27,100 40 per cent.
Individual Savings Account:
A new tax-saving plan available from April 6, 1999. The
Isa will replace Peps and Tessas, enabling investors to
protect shares, unit trusts, investment trusts, cash deposits
and some life insurance policies from tax.
Investment trust: An investment
fund which pools investors' money and invests it on their
behalf, usually in shares. An investment trust is set up
as a listed company with a limited number of shares that
investors can buy and sell on the stock market. The trust's
shares may trade at a price that is higher or lower than
the value of its underlying assets. This is known as at
a premium or discount.
National Savings: A range
of deposit accounts and bonds run and underwritten by the
Government. Some, such as savings certificates, offer tax-free
interest, others are taxable. The most attractive feature
is the 100 per cent guarantee on all cash invested.
Open-ended investment company:
An OEIC (pronounced oik) - is a new type of investment fund
that could replace unit and investment trusts. It is open-ended,
accepting any amount of investors' money on a continuing
basis, but is structured as a company with shares. Most
importantly, the shares have a single price for both buying
Pension: A scheme that enables
employees and the self-employed to accumulate savings for
their retirement. Premiums into a pension fund receive tax
relief, capital gains and income rolled-up tax-free within
the fund, and a proportion of the eventual payout (when
the investor reaches the age of 50 or retirement) can be
taken tax-free. The remainder must be used to buy an annuity
to provide income for the rest of the investor's life. Many
employers run pension schemes for their employees, but those
who are not eligible or who are self-employed can buy personal
pensions from insurance companies.
shares: PIBS are shares in a building society that pay a
fixed rate of interest for an unlimited period. They are
bought through stockbrokers like any other share, and their
price fluctuates according to changes in interest rates
Personal Equity Plan or Pep:
A tax shelter that allowed the investor to protect investments
worth up to £6,000 from income and capital gains tax
each year. Pep sales ended on April 5, 1999, but existing
schemes will be allowed to continue.
Postal accounts: A bank or
building society account that operates by post. The investor
can deposit money by sending a cheque to the bank or building
society and can take money out by sending a withdrawal slip.
Premium Bonds: A National
Savings investment that is popular with higher-rate taxpayers.
Monthly prizes (all tax-free) range from £50 to the
million-pound jackpot introduced to compete with the National
Lottery. Winning bonds are selected by Ernie (not a computer
but an electronic random number indicator). Investment is
from £100 to £20,000. Each bond has a one in 19,000
chance of winning a prize in any draw. Those who have the
maximum holding should, on average, win 12 prizes a year.
Single-premium bond: A lump
sum investment into the unit-linked or with-profits funds
of an insurance company. In return the investor benefits
from a small amount of insurance cover and a share in the
returns of whichever insurance fund he has chosen.
trust: An investment trust that offers several different
types of share, each performing a different role. The most
common types offered are income shares, which receive all
the dividends produced by the trust's assets, zero-dividend
preference shares, which produce a predetermined sum of
capital when the trust is wound up, and capital shares,
which receive any assets left over once other types of share
have been paid their entitlement.
Tax-Exempt Special Savings
Scheme: Tessas are building society or bank savings accounts
that pay interest tax-free; provided investors leave their
capital in the account untouched for five years. Up to £3,000
can be invested in the first year, £1,800 in the next
three years and £600 in the last year. The sale of
new Tessas ended on April 5, 1999, but schemes which had
already been started before then can continue as normal.
Traded endowment policy:
A with-profits endowment policy sold by the original investor
to another for a lump sum of cash. If the original investor
dies during the remaining years of the policy term, the
sum assured will be paid to the new owner. Likewise, when
the policy reaches maturity the resulting money, including
annual and final bonuses, will be paid to the new owner.
Tracker fund: An investment
fund emulating the composition of a particular index, such
as the FTSE 100 or FTSE All-share. Often referred to as
index, or passive, funds.
Unit trust: An open-ended
investment fund that can accept any amount of investors'
money on an on-going basis, investing it in a wide range
of shares, fixed-interest securities and property. The fund
is divided into units which rise and fall in value in line
with the value of the underlying assets.
Venture Capital Trust: A
listed investment company that invests in a range of unlisted
and AIM-quoted companies. It offers a range of income and
capital tax gains reliefs for people who leave their capital
in place for a minimum of five years. Maximum investment
of £100,000 a year.
With-Profits Endowment: A
regular long-term savings scheme with an insurance company.
Each year the insurance company adds bonuses (either called
reversionary or annual) which cannot be taken away. At maturity,
a terminal bonus is paid. Still used as a means of savings
to repay a mortgage, although less popular than in the late
Eighties. Anyone forced to cash in the policy in the early
years may receive a poor surrender value as a result of
the large deductions made at the outset to pay commissions
to salesmen and other middlemen. Insurance companies also
sell with-profit bonds, for those seeking to invest a lump
sum over a five-year period, or longer. They are aimed at
those seeking either an income or capital growth. The returns
on with-profit bonds are free of basic-rate tax.
Investing in the stock market
always carries a risk so make sure you're clued up.....
Before buying any share, immerse
yourself in the business section of this newspaper, studying
bids, deals and company results announcements. The Internet
is also a useful source of information. The Stock trade
site, for example, has a company research facility, The
Knowledge Centre, that provides data on 2,400 stocks. But
following share tips on the bulletin boards of Internet
sites, such as Interactive Investor and Hemmington Scott,
is not the way to riches. Be very wary of tipsters and remember
that just because a share is priced in pennies, it is not
necessarily cheap. The Which? Guide to Shares, explains
what shares to buy, how to value them and how to construct
a portfolio. Check share prices daily in The Times and during
the day on Times-Money, our personal finance website.
Selecting a broker
Decide the kind of service
you want. Some brokers advise clients which shares to buy;
others - execution-only brokers - simply carry out buying
and selling orders. A third category, known as discretionary
brokers, will invest a lump sum in the stock market on your
behalf. Just hand over your cash, agree a fee and set your
targets with the broker. This sounds an easy option but
it is unlikely to be cheap. Brokers who offer advice charge
more than those who do not. You pay for their recommendations
through higher commissions each time you buy and sell shares.
You may also be asked to have a minimum of £50,000 - or
even £100,000 to invest.
Commission can be as much
as 2 per cent, although the rate usually drops off for larger
transactions. Greig Middleton, the City stockbroker, charges
1.95 per cent for the first £10,000 worth of shares, 0.8
per cent for the next £10,000 and 0.5 per cent thereafter.
There is also a £7.50 administration charge per transaction.
Barclays Stockbrokers charges a minimum of £1,000 a year
for its advisory service.
Savers with less than £50,000
to invest are probably better off with an execution- only
broker, which will probably provide some basic information.
Barclays Stockbrokers has a recorded telephone service,
which for 50p a minute gives opinions on about 200 stocks,
updated on an ad hoc basis. Greig Middleton sends all clients
a monthly stock market newsletter.
Execution-only services are
relatively cheap. Barclays charges telephone clients a minimum
commission of £17.50 a trade. You can obtain a list of about
180 UK stockbrokers through the Association of Private Client
Investment Managers and Stockbrokers (Apcims).
There is a fast-expanding
universe of cyber-dealers hankering for your business. Charles
Schwab, the online broker, is so keen to get you on board
it will offer a free dealing service for the first 30 days,
after which there is a minimum charge of £15 a transaction
for clients who do not trade regularly. If you are really
enthused about armchair dealing, Schwab offers a Frequent
Traders Club package, which has an initial £60 annual membership
charge. After that the fee is a flat £19.50 a transaction,
regardless of the number of shares traded. Barclays' online
broking service charges a minimum of £11.99 a transaction.
Starting in a small way
Think about buying into collective
share funds, such as investment and unit trusts. These pool
the savings of thousands of investors, so the managers can
purchase shares in a vast array of companies. Because the
risk is spread over a large number of shares in different
sectors, this is a far less hazardous form of investment.
Savers typically pay an entry
fee of between 3 and 5 per cent, as well as an annual management
fee of 1.5 per cent.
Jason Hollands, of independent
financial adviser BEST Investment, recommends three unit
trusts for first-time savers. All three are biased towards
UK shares but also invest in companies in the US, Japan
and Europe. Mr. Hollands likes the Fidelity International
Fund, the Gartmore Global Growth Fund and Mercury's Global
Titans fund, which was launched in January.
The other advantage of investing
in collective vehicles is that savers can add money to their
fund on a monthly basis and so help to protect themselves
against the vagaries of stock market price movements. A
fall in share prices means that investors will be able to
buy units at a cheaper price.
Investors can add £50 a month
to the Gartmore, Mercury and Fidelity unit trusts, but some
fund managers allow savers to contribute as little as £10
The M&G UK Growth fund
requires a minimum monthly contribution of just £10. The
Legal & General UK Index Fund also has a £10 minimum,
but if the fund is purchased as part of an individual savings
account, the lower limit is £30. One of the advantages of
this fund, which mirrors the FTSE all share index, is that
there is no initial charge and the annual management fee
is just 0.5 per cent. If you want a stake in new technology,
Framlington's NetNet fund offers an opening.
In 1997, the Chancellor, Gordon
Brown, announced that from 6 April 1999 PEPs and TESSAs
would be replaced by ISAs.
Existing PEPs (and TESSAs)
can continue as before, but no new investment can be made.
ISAs will run for an initial
guaranteed period of ten years, but will be reviewed after
seven years. They will be available to all UK residents
aged 18 and above.
The maximum annual investment
is £5,000 (£7,000 for 1999/2000 and 2000/2001) of which
£1,000 can be in cash and £1,000 in life assurance.
The account will be entirely
tax free and for the first five years a tax credit of 10%
will be paid on dividends from UK equities.
There is no minimum investment
period and savers can use up to three separate ISAs a year
subject to the overall limits.
ISAs are known as Maxis -
with a maximum investment of £5,000 per annum(£7,000 for
the year 1999/2000 and 2000/2001) allowing £1,000 in cash
and £1,000 in Life Assurance from a single provider - or
Minis which offer just one of the three components, either
stocks and shares, cash or life assurance. You are able
to invest in up to three Mini ISAs from different providers
up to the maximum investment of £5,000 per annum (£7,000
in 1999/2000 and 2000/2001).
It will not be possible to
have both a Mini and a Maxi ISA in the same year.
In addition it will be possible
to transfer the maturing proceeds from a Tessa into a Tessa
only ISA, though this may not be available from all providers.
The Government has issued CAT standards (Fair Charges, Easy
Access and Decent Terms - which must qualify for one of
the most contrived acronyms ever). It appears that relatively
few ISAs will meet theses standards, providers believing
that a well managed fund with normal charges will give better
returns over the longer term than funds with lower charges
but potentially lower investment returns.
Relatively few of the early
providers are offering a life assurance element, but some
are offering an ISA home purchase plan for mortgage repayment
which can include term assurance and critical illness
cover. There is some concern that the Chancellor has only
guaranteed a life of ten years for ISAs, which may be too
short for some mortgage repayments plans.