The next instalment of our A-Z Guide to Financial Planning focuses on the letter I – Investments.
Investing is a broad topic that can seem intimidating to people. Whilst having multiple options is usually a good thing, too many options can sometimes be overwhelming, causing people to make the wrong decision or avoid making any decision at all.
A surprise windfall, an inheritance or even a divorce settlement can provide a boost to your finances, but it also demands some difficult decision-making. You might have immediate plans for the money, a much needed holiday or home improvements, but if you want to secure your finances for the future, a lump sum provides a great opportunity to start an investment plan.
There are dozens of options available and there isn’t a single investment product that will work for everyone, so it is important to consider your personal situation in order to find the best investment or package for your needs.
With this in mind, we have outlined below a range of investment ideas that you can consider when reviewing your investment plan.
- Investment Isa:
The Investment ISA is a Stocks and Shares ISA. It enables you to invest your money in a choice of funds with different investment objectives. An investment ISA is a tax-efficient way of investing, whether you're looking for regular income or capital growth.
As of 6 April 2012, the Government increased the annual ISA investment allowance to £11,280. Up to £5,640 of that allowance can be saved in a Cash ISA.
You can keep your Investment ISA for as long as you like, but it should be regarded as a medium to long-term investment. The value of your investment and the income from it can fluctuate, you may get back less than the value of your original investment and tax rules may change in the future.
- Stocks and shares:
Also known as equities, a share represents a share of ownership in a company. You become a joint-owner of the company along with all the other shareholders. When you invest in shares, the aim is for the shares to grow in value over time; and also to benefit from a share in the profits of the company in the form of regular dividend payments. Shares give investors the opportunity for a steady income and capital growth. It is important to remember that neither of these is guaranteed.
Share prices can change suddenly, which means they are considered a higher-risk investment than cash, bonds and property. If you invest over a longer period you’re in a better position to ride out any fluctuations in the market.
You can buy shares directly from a stockbroker or trader, or you can invest through an investment fund.
A bond is a form of debt issued by companies (corporate bonds) or the government (gilts) to raise money. When you purchase a bond you are lending money to the issuer. In return, the issuer promises to pay you a set rate of interest each year and to repay your capital at a set date in the future, known as the redemption date.
Bonds are suitable for short to medium term investment and tend to be lower risk than property or shares, but higher risk than investing cash in a savings account. You can usually sell your bond at any time with minimal impact to the capital invested.
If a company collapses, bond holders will be paid before shareholders, but ultimately repayment will depend on there being funds available. The return from bonds is not guaranteed, therefore, it is important to select an issuer who matches your risk profile.
You may also want to consider diversifying your portfolio to include property. This can be a good investment and can accumulate wealth overtime. If you own rental properties, it can also add another good income source to your salary. When purchasing property for investment purposes, it is important to consider the responsibility and future costs that come with owning property.
Property investment needs to be viewed as a medium to long-term investment. A minimum 7-year investment period is usually recommended.
When considering any type of investment, it is important to think about your personal circumstances, ensuring that the investment works for you and your needs. Review Retirement and Investment Solutions tried and tested ‘10 Golden Rules’, to ensure your investment options meet your objectives.