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Investing your capital

What Investment options are available?
The range and choice of investment products is enormous. Competition between the many providers is intense. Some products produce guaranteed returns, whereas with others the investor's return varies with fluctuations in the stock market or changes in interest rates or in market demand for property or other securities. A product that maybe ideal for one investor may be wholly inappropriate for another. Indeed a product recommendation suited to a particular investor under one set of investment conditions may be much less so when these conditions change.

At Provident Solutions we believe we have an important role to perform in helping people to make the right investment choice. We aim to show our clients the potential advantages and disadvantages of the major courses of action that lie open to them. We will consider client's existing investments and their attitude to risk in arriving at first 'asset class' recommendations before moving onto to consider generic product types, then specific product providers and ultimately individual fund choices. Only in this way can our clients make an 'informed choice'.

We believe that advice on the most appropriate investment recommendations can only be given after fully evaluating a customer's current financial circumstances together with their future aims and objectives. We have therefore listed below the various investments available with a generic description for each. We strongly recommend that you call us now on 0116 2592371 so we can arrange to visit you and conduct a thorough analysis of your investment requirements before making any specific recommendations.

What are the main types of Investment vehicles available?
Lets have a look at some of the more common types of investments:

Guaranteed Income Bonds
A guaranteed income bond is a very simple contract. In return for a single premium, the bond provides a guaranteed income each year for a specified period and then on maturity returns the investor's capital. Life offices offer these contracts from time to time depending on their own internal taxation position. At any one time there will usually be a handful of offices in this market although most tranches are for a limited time or for a limited total amount. The income is usually payable yearly in arrears and most bonds are for terms of up to five years. The attraction of these bonds is that the income is guaranteed. The rate offered at any particular time varies according to market conditions. Although called income bonds, technically the 'income' is capital.

For a basic rate taxpayer, there is no liability to tax at all on the income. However, it must be remembered that any income in excess of 5% must be added to the investor's other income for that tax year to decide whether he is still a basic rate taxpayer. Thus, for a basic rate taxpayer, a bond offering 4% is equivalent to a taxable investment offering 5.1% gross interest. The maturity value is a guaranteed return of the single premium and so the investor will have had a guaranteed tax-free income, plus a return of capital. The combination of security and good net returns make this an attractive investment for a basic rate taxpayer.

However, there is a possibility of a tax liability on maturity if, by then, the investor is a higher rate taxpayer. Higher Rate tax payers will have to pay tax at thier top rate minus the basic rate on the gain.
For this reason, these bonds are especially attractive to investors who are sure that they will continue to be basic rate taxpayers for the term of the contract. This would include many retired people whose expectations of increased future income are normally less than those of younger people who are still working.

Guaranteed Growth Bonds
These are similar to guaranteed income bonds except that no income is paid. The investor pays a single premium and is guaranteed a capital sum in three, four or five years' time. The investor is thus getting a guaranteed capital appreciation which is free of CGT and basic rate income tax.
As mentioned above, the security and good net return make these bonds attractive to a basic rate taxpayer. However, to be sure of being free of tax, the investor must still be a basic rate taxpayer in the year of maturity, after taking into account the whole top-sliced gain. Neither type of guaranteed bond should be used if the investor might wish to cash in early, because often surrender values are not available and, if they are given, they will usually result in a yield much lower than the guaranteed rate.

Unit Linked Bonds
Under a unit-linked bond, the single premium buys units in the fund of the investor's choice. This might be run by the life office itself or be a unit trust run by the life office or another institution. The value of the policy is measured by the total value of the units allocated to it. Immediately the bond is effected, its surrender value will be lower than the single premium because of the difference between the buying and selling price of the units, usually 5%. From then on, the bond's value will depend on the performance of the fund (or funds) to which it is linked.

Most offices have a variety of funds on offer with different risk and growth prospects. The funds most usually available are as follows; Cash fund, Gilt fund, Fixed Interest fund, Property fund, Managed fund,and various Equity funds spread across differing geographical areas. An investor usually has the option to invest in one or more funds and 'switch' between the funds on an ongoing basis.

These type of bonds usually carry no tax liability for basic rate tax payers but there may be a liability to Higher Rate Tax depending on an individual's circumstances when they encash (or take withdrawals from) the Bond.

Distribution Bonds
Ordinary unit-linked bond funds do not separate income and capital, and the investment returns from reinvested income are simply reflected in the unit price. Any withdrawals taken as a form of income are achieved by cashing in units, which thus have no particular relationship to the actual income generated by the fund.

Distribution bonds effectively distinguish between income and capital so that the income withdrawn reflects the income generated by the fund. This leaves the capital intact, although this could still rise or fall. The way these bonds work is that the money is invested in a special distribution fund which pays out the 'natural' accrued income of the fund (i.e. dividends, interest, rental income) twice or four times a year. Some offices can pay monthly. Investors can take these payments as income but there are no un;t encashments and thus the number of units in the bond remains constant. However, the unit price will fall in line with the payout on each distribution date. The investment managers of the fund have to bear in mind the requirement for income in the way they manage the fund's assets which tend to be well spread with a high proportion of gilts and other fixed interest securities to lessen the risk. These bonds should be looked on as a medium to long-term investment as a number of offices have early surrender penalties. The taxation of these bonds is the same as for ordinary unit-linked bonds.

A distribution bond would be a good investment for someone requiring income but who is a cautious investor, as the risk profile in general is fairly low - yet there is still a reasonable chance of capital growth.

Guaranteed Equity Bonds
A number of companies have introduced various types of unit-linked bonds with some form of guarantee. The guarantee is often that on the fifth anniversary the bond is guaranteed to return at least 100% of the original capital investment regardless of the performance of the underlying funds. The guarantee is normally achieved by some form of traded option arrangement made by the life office. The guarantee will operate only on the fixed date and if the bond is surrendered before or after that date the normal unit value principle will apply. Many of these bonds are available in limited amounts for short periods only.
Some bonds also guarantee a percentage of the growth in the FTSE 100 Index or some other index and a few have an option (for an extra charge) to lock in growth if the index goes over a set limit.

These investments are worthwhile for those who like the idea of an equity-linked product but who do not want to risk losing money. However, it should be remembered that although getting your capital back after five years is not on the face of it a loss, it is in real terms because of inflation. Also an investor should appreciate that he needs to hold the bond for the full term to benefit from the guarantee and thus these bonds are not suitable as short-term investments or where the money will be needed at an indeterminate time.
Another point to be made is that the FTSE 100 Index measures the price of shares in the UK's top 100 companies and makes no allowance for dividend income which can be a useful part of normal unit-linked fund growth. It should also be remembered that all guarantees cost something. Thus, in general terms the better the guarantee the less will be the ultimate return when compared to a non-guaranteed equity bond if stock market performance over the period is very good.

With-Profits Bonds
A number of life offices offer with-profits bonds. This is usually done by having a unitised with-profits fund as an addition to the office's normal unit-linked funds. The fund may have a unit price which is increased only once a year when bonuses are declared. Alternatively, the unit price could be fixed and when bonuses are declared this is reflected by an additional

Allocation of units. Sometimes, there is a terminal bonus on the tenth anniversary, when the money can be taken out or reinvested. There might also be some guaranteed minimum turn on the tenth anniversary, via a guaranteed minimum bonus rate. These bonds will avoid the dramatic rises and falls in unit values seen on full unit-linked contracts due to the cushioning effect of bonus declarations. Also, once bonuses are allocated they cannot be taken away, although there may well be penalties on early surrender resulting in the full value of bonuses not being available.

The policies will be written as whole life policies but perhaps with some form of guaranteed minimum performance on, say, the tenth anniversary. However, changes in valuation rules have made such 'spot guarantees' a rarity on new contracts. There will usually be the right to switch into a unit-linked fund, although penalties similar to those on surrender may be incurred if this is done in the early years. There will be the standard 5% bid-offer spread, or an early exit penalty in the first five years.

Most offices operate an MVR (Maturity Value Reduction Factor) to protect the interests of investors remaining in the with-profits funds. The MVR can be applied at the life office's discretion to reduce the amount payable on surrenders or switches and may be applied in times of adverse investment conditions - e.g. a stock market crash. Under older policies usually the MVR will not apply on death or at any time when benefits are in part guaranteed - such as the tenth anniversary. The idea is to prevent the value leaving the fund exceeding the value of the underlying assets.

Unit Trusts and OEICs
These are pooled funds where individuals buy units in a fund at a published price. The fund then buys assets in Equities within their investment remit and the fund is wholly reliant on the performance of the assets. The fund is open i.e. unlimited numbers of people can invest in the fund - the fund just issues more units and invests the money in more assets. Your money is pooled with that of other savers and invested by a professional fund manager. Generally these funds invest in the stock market. With more than 1,000 to choose between from dozens of investment companies, it is possible to find funds investing in the most exotic stock markets and the most complex financial instruments. So-called hedge funds, whose main claim to fame is to be able to make money even when markets fall, can be extremely complex.

OEICs are open-ended investment companies. Although an OEIC is structured along similar lines to a unit trust, it differs in having no bid/offer spread. This means buyers and sellers get the same, single price. Additionally, OEICs have an umbrella structure allowing numerous sub-funds investing in different types of assets, so the investor can switch more easily between different specialist areas.

ISAs (Individual Savings Accounts)
ISAs can be viewed as a 'Tax Efficient Wrapper' that is placed around collective investments such as Unit or Investment Trusts & OEIC's. You can invest up to £20,000 in a 'Stocks & Shares' Investment ISA or you can deposit up to £20,000 into a Cash ISA or any mixture of the two subject to the overall maximum of £20,000. (Figures are for the 2017/2018 Tax Year)

Investment Trusts
This is actually a company, which invests in other companies. Investment Trusts are listed on the Stock Exchange, have an independent board of directors and a pool of shareholders like other public companies. An investment trust has a team of salaried staff or, more commonly, contracts the services of a specialist fund management company.

Venture Capital Trusts
A venture capital trust or VCT is a highly tax efficient UK closed-end collective investment scheme designed to provide private equity capital for small expanding companies and capital gains for investors. VCTs are a form of publicly traded private equity (share). They do however off a very generous 30% tax credit (on new investments up to £200,000 per tax year), Tax-free dividends and no capital gains tax payable. However VCTs are higher risk investments and are not suitable for everybody.

Enterprise Envestment Schemes
Enterprise investment schemes or EISs are a tax-efficient way to invest in the new shares of small businesses, as well as giving much-needed capital to businesses that cannot get funding from traditional methods like the banks. The schemes offer investors significant benefits as investors who invest for a minimum period of three years benefit from 30% tax relief as well as exemption from capital gains tax (CGT) and Inheritance Tax (IHT) – which means growth within the EIS is highly tax efficient. However EISs are very often illiquid and higher risk investments and are not suitable for everybody..


How do I find out more?

Call us now on 0116 2592371 and we can arrange to visit you and conduct a thorough analysis of your Investment requirements and provide you with the appropriate recommendations.

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