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Financial advisors will tell you that there is a balance between the risk and the return that you may achieve from your savings and investment plan.

Generally the higher the risk, the higher the potential return that may be available to you. However you must understand that this also means there is a grater risk of losing money.

If you implement an investment with a lower risk profile this may result in a lower return to you but as you will understand a lower risk of losing money.

You must also consider that if the growth that you achieve is low, this would mean that there is even a risk that your investments will not keep pace with inflation, as such the spending power of your assets may vary well reduce over time.

If you are considering investing or saving in stock and shares, we would normally recommend that this type of plan is implemented over a longer period, usually 5 years or more. This is to reduce any risk that your plan may be exposed to in a volatile market.  

Clients who wish to reduce the risk associated with their plan, should consider a broader spread of assets and not look to invest in a specialist area or market

Always remember that past performance is not a guide to future performance, the value of investments and any income that you may be taking can go up as well as down.

Your financial advisor will advise you fully of all aspects of any potential savings plan or investment before you go ahead. Always ensure that obtain a key features document, illustration and supporting documents before you implement any investment or savings plan. This will also enable you to compare the features, benefits and risk profile with products from various providers.

OEIC stands for an open-ended investment company, which works in a very similar way to a unit trust, except that an OEIC is legally constituted as a limited company (Plc). OEICS have been operating outside the UK for some time but only since 1997 has it been possible to operate an OEIC in the UK.

OEICS are not trusts and therefore do not have a trustee. However they have a depositary, this holds the securities and has similar duties to a unit trust trustee.

Most OEICS operate as umbrella fund. This which means that the OEIC is authorised and then can set up sub-funds without gaining individual authorisation for individual sub-funds. Each sub-fund has different investment aims, e.g. a sub-fund may specialise in the shares of small companies or in a particular country, e.g. the USA. Each sub-fund can also have different charges and minimum and maximum investments. Unit trusts are allowed to do this too, but few do.

Most OEICS only have one unit price and the initial charge is added as an extra. Unit trusts always have two prices, the lower or bid price is what you get when you sell the units back to the managers; the higher or offer price is what you have to pay when you purchase the units.

UK AUTHORISED UNIT TRUST OR OEIC

Unit trusts are a popular investment vehicle’s, they are 'open ended collective investments' which put the cash of many investors into one fund, known as a 'pooled fund. This system allows investors to invest "collectively" which has the benefits of spreading and reducing risk and keeping costs under control. Unit trusts allow you to invest in the stock market but enable you to spread your risk and benefit from expert investment management.

There are many unit trusts to choose from across a wide range of investment sectors. The managers of the trusts can buy and sell within the trust without having to pay any tax, however tax liabilities can arise on dividends and unit sales by the holder

An investment trust is a collective type of investment; this is because it pools together the funds of investors in order to make investments in a range of companies.

Investment trusts are based upon fixed amount of capital that is divided into shares. This makes them closed ended unlike the open-ended structure of unit trusts. Once the capital has been divided into shares, investors can then purchase the shares.

Another major difference between investment trusts and unit trusts is that investment trusts can borrow money for their investments (known as gearing up) whereas unit trusts cannot. Gearing up can work to the advantage and the disadvantage of investment trusts, and this will depend on whether the stock market is rising or falling.

Investment trusts can also invest in unquoted or unlisted companies, which may not be trading on the stock exchange either because they don't wish to or because they do not meet the given criteria. This ability, combined with the ability to borrow money for investments, can make investment trusts more volatile. You can buy investment trusts through a regular savings scheme or through a stockbroker. The cost of these trusts can vary, and are dependant on the demand for the trust as well as the NAV (net asset value) which is the value if the investments that the trust holds.

There is a little more flexibility with the investment trust because investors can choose to receive income, capital growth, or a combination of both income and capital growth. The amount that can be invested in investment trusts can also vary dependant upon where the assets of the trust are located.

For trusts that have at least half of their assets in the UK or Europe, £6000 can be invested. For trusts that have the majority of their assets elsewhere, the investment limit is currently £1500. An independent board manages investment trusts, and the aim of the board is to monitor investments and look out for shareholders' interests. A fund manager is also appointed to make a decision about what sort of investments to make. This could be an external fund management group, or a salaried fund manager (which is known as a self managed trust). As with all investments, it is wise to do a little research and look more closely into the pros and cons of investment trusts prior to making any firm commitment.

Most normal savings accounts and investments are taxed – so the taxman gets some of your interest, or investment growth.

Individual Savings Accounts or ISA’s are different, because you don’t pay any tax on the interest paid on your savings – or capital gains on investments. An ISA is simply a way of preventing too much of your money from going to the taxman. Thus this will give your finances a real boost.

The government has to limit how much you can put into an ISA each tax year. This is currently up to £10.680 for the 2011 / 2012 tax year. You can invest your full allowance into a stocks and shares ISA, or you can invest up to £5,340 in a cash ISA and a further £5,340 in a stocks and share ISA. Please note however that the government could change in the future the allowances illustrated above.

Whether you like saving in cash, stocks and shares, or a combination of both, there’s an ISA out there for you.

Cash ISA is a lot like a regular savings account - except you don't pay any tax on your interest. This makes a real difference to your savings, helping your money to grow. As noted above, in the current tax year, you can invest a maximum of £5,340 into cash ISA. (2011 / 2012 Tax year)

 If you have an ISA with a provider and you wish to transfer this to another providers Cash ISA or Stocks and Shares ISA. By transferring the funds, you keep all the tax benefits.

However, if you withdraw money from a cash ISA, you lose the tax benefits on the funds you’ve withdrawn. The only way you could reinvest into cash ISA is to take advantage of the ISA allowance that you haven’t used for that current tax years allowance.

Stocks and Shares ISA’s give you the potential for higher levels of growth than Cash ISA’s. However, it is very important to remember that the value of stocks and shares can fall as well as rise. As such you may not get back the full amount of your original investment.

A stocks and shares ISA is designed to give you a tax-efficient return over years, not months. We would recommend a minimum term of 5 years or longer. So although you can access your money at any time, you should consider this as a medium to long-term investment plan.

The most you can save into a Stocks and Shares ISA this tax year is up to £10,680. However if you have invested into cash ISA in the same tax year, you will only be allowed to invest a maximum of £5,340 into your stocks and shares ISA. (Again these limits apply to the 2011 / 2012 tax year. The government could alter these limits in the future)

Investment bonds are sold by life insurance companies and allow you to invest in a variety of funds managed by professional investment managers. They are normally designed to produce long-term capital growth, but can also be used to generate an income.

The minimum investment can range from £5,000 or £10,000 but this will depend on the particular provider. When you invest in a bond, you will be normally be allocated a certain number of units in the funds of your choice. Each fund will hold a portfolio of investments, such as shares or bonds, and the price of your units or value of your capital may rise and fall in line with the value of these investments. Technically investment bonds are single premium life insurance policies. This means an element of life insurance is normally provided. But it is tiny, typically adding an extra 1 per cent or less to the value of your investment, if it is paid out after your death.

In previous years, investment bonds provided a choice of around half a dozen ‘unit linked’ funds covering different types of investments - UK equities (shares), overseas equities, commercial property, fixed interest securities and cash. Investors could choose a combination of funds and switch between them a couple of times a year free of charge, or they could opt for a managed fund which included a combination of different investments such as equities, bonds, cash and property. Nowadays, many investment bonds tend to offer investors access to funds, which invest in a wide range of top performing unit trusts. To improve performance, a portfolio of these funds can be held within a bond.

Like managed funds, with profit funds invest in a spread of investments, but the way the gains and losses on these investments are passed on to investors differs. Returns on with profit funds are distributed through bonuses decided by the insurance company. The aim of with profits bond is to smooth out the returns so that investors do not suffer the fluctuations that can occur when investing in the stock market.

These bonds can fluctuate in value, but many have a good record for producing a steady income.

As bonds are life insurance policies, it is the insurance company that must pay tax on the income and capital growth generated by the investments held in a bond. Investors do not pay capital gains tax on any gains, nor do they pay basic rate income tax on any income. Higher rate taxpayers may become liable to income tax at a rate equal to the difference between the basic rate and the higher rates (20 per cent), but not until they cash in their bonds or make partial withdrawals of over 5 per cent per annum of their original investment. This is because there is a special rule; this allows annual withdrawals from bonds of up to 5 per cent of the original investment for a period of 20 years without any immediate tax liability. It is possible to carry these 5 per cent allowances forward, so if you make no withdrawals one year, you can withdraw 10 per cent of your investment the next, without triggering a tax charge.

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• What is an OEIC?
• What is a Unit Trust?

• What is an Investment Trust?
• What is an ISA?
• What are Investment Bonds?

This calculator is for guidance purposes only, figures may differ according to your personal circumstance.

Commodore Finance Limited is an Appointed Representative of Personal Touch Financial Services Limited which is authorised and regulated by the Financial Services Authority

Some of the products/services shown above are not or may not be regulated by the Financial Services Authority.  

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