Investment

There are four main types of asset that you can invest in:

• Equities (or shares) - where investors own a share of a company
• Bonds - which are company or government IOUs
• Cash - such as deposit accounts with banks or building societies
• Property - such as residential and commercial buildings or property related shares

At St Thomas Financial Services we offer advice and management on funds which invest in these assets. A benefit of investing in a fund is that your money doesn't just rely on the performance of a single company or asset but is spread across a range of companies and investments. This helps to reduce investment risk.

These asset classes, as they are known, perform differently in different market conditions and each can be appropriate at different stages of life. Equities tend to perform better than cash, bonds and property over the longer term but they may carry a greater investment risk so it is important to have a balance of investments within any portfolio.

Here is a short guide to the principal investment options which we deal with:

Unit trusts and open ended investment companies (OEICs)

Unit trusts and OEICs are collective investments which pool the resources of many investors to provide a fund for investment by professional fund managers. Your investment will be spread over different assets in a fund which helps to reduce investment risk. 

There are a large number of funds available with different objectives so fund selection is of prime importance and asset allocation within any portfolio needs to be consistent with your objectives and your attitude to investment risk. The funds are designed for medium to longer term investment but can be encashed at any time. It is possible that you may not get back your original investment if the fund price is not favourable at the time of encashment.

ISA allowances and PEPs can be used with unit trusts and OEICs so that they are sheltered in a tax efficient environment. At present both capital profits and income receipts within a fund are free of any liability to tax if held within an Individual Savings Account (ISA) or Personal Equity Plans (PEPs). 

Life assurance bonds

These are also collective investments and are technically single premium, whole of life assurance policies. The life assurance element is minimal - usually 101% of the value of your fund. This means that on death the value of the policy would be returned plus up to 1%.

As with unit trusts and OEICs, there are a large number of funds with different objectives and risk levels to choose from.

As life assurance policies they benefit from advantageous tax regulations whereby corporation tax at 20% is deducted from within the policy. Basic rate taxpayers have no further tax to pay. Where there is a tax charge for higher rate taxpayers this will be at 20%.

There are restrictions on withdrawals. Investors are allowed to encash an amount equivalent to 5% of the amount originally invested for each year the bond has been held. Amounts up to this level can be withdrawn without paying any tax at the time. This is particularly useful for higher rate tax payers who would normally pay 40% on income. The 5% withdrawal is equivalent to an interest bearing account paying 8.33% for a higher rate tax payer. However tax is only deferred and there may be a tax charge later depending on your rate of tax at the time.

There are 2 types of investments linked to life assurance policies - with profits and unit linked. The objective of with-profit funds is to smooth out the volatile returns from the market and the underlying investments. When returns are good, money is set aside as reserves. When returns are poor, the reserves can be used to make up the bonuses which are added to the policies. In recent years some companies with profits funds have stopped adding bonuses as a result of poor investment returns.

With unit linked policies the value of the units is directly affected by the underlying investments and there is no smoothing of returns.

Stock market linked income and growth bonds

These types of investment aim to provide capital growth linked to a stock exchange index with a return of the original capital dependent on the performance of the index.  A proportion of the investment is put into lower risk assets to provide a return of capital. The remainder is invested in derivatives such as options and futures.These are "one off" investments only available for set periods. 

Property partnerships

A property partnership is a way of pooling your money with other investors to invest in commercial property. The partnership is usually "limited" with no partner having responsibility for any other partner's liabilities. Partnerships generally have a relatively high minimum cash investment.

Investments are often single properties and available only on a "one-off" basis. Normally capital can only be released once the property is sold. The expected investment timeframe will vary but is often 5 to 10 years.

Another route for property investment is through a unit trust or OEIC where the fund invests in a spread of properties or shares in property companies. This option is likely to be lower risk than a property partnership.

Venture capital trusts (VCTs)

These trusts allow collective investment into unquoted shares and by their nature are higher risk. However there are a number of tax breaks to encourage investment in smaller companies.

Investment opportunities will depend on trusts available at the time of investment.

Enterprise investment schemes (EIS)

This scheme is for buyers of newly issued shares in unquoted companies which have registered as an EIS. As with VCTs,  there are a number of tax advantages.

As with VCTs, this is a higher risk option.