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A Guide to Lump Sum investments

 

Introduction

The world of investment has never been more complicated than it is today and as a prospective investor you need all the assistance and guidance that you can get to choose the right investment vehicles for your needs. Your choices should be governed by your investment time horizon, attitude to risk, capacity for loss, income and capital gains tax position, income requirements and the amount of capital you have to invest.

It is often helpful to consider your investments under 3 headings to ensure you cover all your requirements:

Short term i.e. what amount you consider you need ready access to, to cover monthly bills and other anticipated expenditure.

Medium Term i.e. money which you are happy to invest for periods up to 5 years but which you might also need to draw on for unexpected events

Long Term i.e. money which you can invest for more than 5 years to give it time to perform and which you are likely to have flexibility around when you withdraw it, in case market conditions are not good. 

Your attitude to investing in each of these cases may well vary e.g. your attitude to risk

This guide aims to provide you with the basic knowledge required to be able to make an informed decision about the right type of investments for you. It covers a number of standard types of investment but there are many options and variants these days, so if you want to explore these and other types of investments it would be wise to consult a financial advisor.

Savings v Investments

There is a distinction between savings and investments. With savings there is no risk to your capital. In general you receive interest either fixed or variable on your savings and the amount of interest may vary significantly between different types of investment, organisations and the length of time you tie up your savings for. When you close the investment, or it terminates, you are guaranteed to receive your capital back plus any interest accumulated ant not previously paid out.  

Savings include: Bank and Building Society Accounts; Fixed term savings bonds issued by Bank and Building Societies; Regular Saver Accounts; National Savings and Investments including Index linked saving certificates, Premium Bonds, Income Bonds, Direct Saver, and Direct ISA (a cash ISA).

There are also Guaranteed Equity Bonds issued by NS&I and some companies.

With investments your money is entrusted to someone else to look after. The value of your capital may go down as well as up, introducing the concept of risk and return.

As an investor, your return on investments has two components:

- The interest or dividends paid and
- Changes in the value of your capital

Put simply, any financial strategy for retirement will aim to maximise the return on capital, minimise the risk and provide appropriate access. In practice, two things are key: your attitude to risk; and which of the two elements of return you want/need to focus on.

While your desire may be low (or zero) risk for the bulk of your capital, with low interest rates you may wish to take a risk with a (small) part of your capital in the hope of boosting the overall return. Two questions to ask are: “How much of my money (if any) am I prepared to put at risk” and “What degree of risk am I prepared to take with that sum?”

As for the type of return ask yourself: “do I need a regular income from my capital, do I simply want capital growth or is it a mix of the two?” Addressing ‘risk’ and the ‘type of return’ you want will dictate the investment vehicle(s) you use.

Take a look at our Guide to Risk, as this is key to understanding your own risk profile and selecting investments and working with a financial advisor.

Asset backed investments.

Asset-backed Investments, such as stocks and shares, are usually regarded as the best way to combat the effects of inflation on your investments over the medium to long term. Make sure you read our section on inflation as a pre-cursor to reading the rest of this section on investments.

Any individual who is an income tax payer and has some money to save or invest, should know about Individual Savings Accounts (ISAs).

They provide a means of an individual holding investments and not having to pay tax when withdrawing part or all of the investment, or taking income from the investment. Also there is no Capital Gains Tax liability from such investments.

Investments can be made within an ISA, up to each individuals annual ISA allowance. The investments that can be included within an ISA, or of course held outside of an ISA (if the annual allowance is exceeded) include:

  • Shares - investments in individual companies
     
  • Unit Trusts, Investment Trusts and OEICs -  where investments from many investors are pooled, thereby allowing investment in a range of underlying stocks and shares, consequently reducing risk compared to investing in individual company shares. 

An alternative means of investing in a variety of funds managed by professional fund managers is through Investment bonds. These are single premium life insurance policies which allow you to invest in a variety of funds managed by professional fund managers. They will include a small amount of life cover (often just 101% of the amount invested). They also have beneficial tax treatment in certain situations. 

Another alternative is Guaranteed Equity Bonds issued by NS&I, the Post Office and private companies, in theory these enable you to play the Stock Market and keep your capital intact.

Friendly Societies (also known as mutual societies) which are run for the benefit of the members rather than any shareholders, offer 10 year qualifying savings plans, which invest in cash deposits, managed funds or with profits funds. They are free of Capital Gains Tax and income tax. The monthly limit for tax free status is £25. Annually this is £270. 

If security is paramount then Gilts represent borrowing by the Government and therefore have the highest degree of security. An investor in Gilts will be guaranteed a fixed yield for the life of the stock, however the capital they receive back on sale, before redemption date, may be more or less than their original investment.

Similar in some ways to Gilts are Corporate Bonds. These have no Government backing but are issued instead by organisations to raise capital for their operations. Like shares you can invest directly or via pooled vehicles such as investment funds or investment trusts which specialise in corporate bonds.

Other types of investment

The above are just a selection of the most common types of investment. There are a huge variety of others which might be appropriate, particularly for the more sophisticated investor, such as

• ETF’s
• Private Equity
• Gold
• Forex Trading
• Futures & Commodities
• Stamp Collection
• Rare Coins
• Wine
• Antiques

NEXT STEPS

To learn about the following investments, if you aren't already familiar with them click on the relevant link:

However if you feel that you need some help from a financial advisor, then visit our section on obtaining financial advice, or our page on Laterlife selected services and associated advice.

 
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