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
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
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'
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
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
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
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
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)
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.
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
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)
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.