What is the difference between investing and saving?
From childhood, we are told to put away money to save for the future – Saving could be for a number of reasons; from purchasing a property to saving for a dream holiday. Or maybe to be sure that when we really need something we have the funds to acquire it, without having to take on personal debt. However, a lot of people are not aware their savings can often be eroded by inflation especially when interest rates are low. By working with a financial advisor we will try to help you to protect the value of your savings.
People’s aims are broadly the same; to provide for future needs, and to protect ourselves against unexpected expenditure, events and inflation. When planning your finances, it is important to distinguish between savings and investments.
Savings are generally funds you set aside for when you need to access them relatively quickly. These savings will often be for a specific need or purchase, like a holiday or a new car. The most common way of saving is into a bank account where the money can be accessed in an emergency, and for every £1 you put in, you will get £1 back and possibly some interest. You will need to be aware though that if inflation is high and interest rates are low the value of your savings will be eroded. However, you have the benefit of knowing the original capital is guaranteed to be returned.
Investments are designed to be held for the medium to long term, usually at least 5 years. You need to be comfortable with tying up this money for a period of time and should not consider investments unless you have some savings in place. Investment planning is complicated and it is important you speak to a financial advisor to get financial advice that is relevant to your own personal circumstances.
Most investments are not guaranteed to return your money in full, although they do offer the prospect of potentially higher returns than deposit accounts. Potential returns, your attitude to risk and market volatility are all factors that will determine a suitable place for your investments. Your financial advisor will discuss with you the benefits and drawbacks of any investments that they advise you to make and will take the time to assess your attitude and capacity to risk to ensure the investments you select are right for your circumstances.
Individual Savings Accounts(ISAs):
ISAs allow you to save tax-free into a savings or investment account. They are offered by a range of providers including banks, building societies, insurers, asset managers & National Savings & Investments.
There are currently four types of ISA account that can be opened these are Cash ISAs, Stocks & Shares ISAs, Innovative Finance ISAs and Lifetime ISAs. Some people may still have a Help to Buy ISA but it has not been possible to open one of these accounts since November 2019.
In the tax year 2022-2023 you can invest a maximum of £20,000 into ISAs in total during a tax year. This is the total amount you can put into all ISAs you hold. For example you invested the maximum amount of £4,000 into a Lifetime ISA you would only be able to invest a further £16,000 into other types of ISA during that tax year.
Here at PAB Wealth Management our team of financial advisors will help you to invest in the right type of ISA for your needs. Some people will choose to have a cash ISA enabling them to have easy access to their money as and when they need it. Others will look to invest in a Stocks and Shares ISA in the hope of longer term gains based on their personal attitude to risk. ISA’s are classed as tax wrappers, as such any growth in the value of the funds invested is tax free meaning that these can provide an excellent way to achieve tax-free income from your investment.
A cash ISA is similar way to a savings account. However, there are limits to how much you can deposit into a cash ISA per year whereas there are no limits on the amount you can place into a savings account. The benefit to saving via a cash ISA is that you will not pay tax on any interest that is earned. Interest earned on a savings account balance may be subject to income tax. By working with PAB Wealth Management you can be sure your financial advisor will help you to choose the right cash ISA for your needs.
You can save a maximum of £20,000 into a cash ISA during tax year 2022-2023. It is possible to open a Cash ISA as long as you are over 18 years old and UK resident. You can only open one cash ISA per tax year. You can transfer funds from one ISA to another, but you will have to transfer over the full amount in the original ISA.
Stocks & Shares ISAs:
A stocks and shares ISA is an investment account. By holding your investments in the ISA which is a tax wrapper any capital gains and income which you may make are protected from taxation.
Stocks and shares ISAs can be complicated and there is no guarantee of a return on your investment. It is important to speak to your financial advisor to ensure that you make the right investments for your circumstances.
Different types of investment are available within stocks and shares ISAs. You can choose to have a managed account where the funds selected are managed by a fund manager. Alternatively, you can decide on the individual investments you wish to make. As there is the potential for the loss of your initial investment it is important when investing in a stocks and shares ISA to factor your attitude to risk and capacity for loss. This will be completed with your qualified financial advisor to help ensure your attitude to risk is matched to your indidvidual investment strategy.
You can save a maximum of £20,000 into a stocks & shares ISA during tax year 2022-2023. To open a Stocks & Shares ISA you must be UK resident and at least 18 years old.
A Lifetime ISA is a government backed saving scheme which can be used either as a deposit to help people buy their first home or to save for retirement. There are both cash and stocks & shares options this means that there are a range of options available based on your own personal circumstances. Your financial advisor will help you to decide if this is the right type of investment for you.
You can save a maximum of £4,000 into a Lifetime ISA each tax year. In addition to this the government will pay you a 25% bonus up to £1,000 in each tax year. The bonus is paid into your Lifetime ISA account each month.
You can open a Lifetime ISA if you are UK resident and aged between 18 and 39. You will be able to pay into the Lifetime ISA until you are 50. If you wish to use the proceeds from the ISA towards the purchase of a property you must be a first time buyer. If you decide to use the ISA for retirement you will only be able to withdraw money from the ISA once you are 60 years old. If you look to use the funds for any reason other than purchasing a first property or towards retirement you will lose the government bonus.
Innovative Finance ISA:
Innovative Finance ISA’s are a way for individuals to invest in peer to peer lending via an ISA which means that any gains made will not be subject to tax. An Innovative Finance ISA works by matching people who are looking to invest with borrowers who have been unable to find finance via traditional means. This can range from businesses to individuals or property developers. The interest that is received by the investor will be dependent on the level of risk that is involved in the transaction. It is important to note that there is no guarantee of return of the original investment.
Anyone who is UK resident and over the age of 18 can open an Innovative Finance ISA. You can save a maximum of £20,000 into an Innovative Finance ISA during tax year 2022-2023. Innovative Finance ISAs can be risky investments and it is important to speak to your financial advisor to ensure the level of risk involved is in line with your personal attitude to risk.
Junior ISAs are a tax efficient savings plan for children under the age of 18, but they are not available to everybody. To open a Junior ISA on behalf of a child you must be over the age of 16 and UK resident, in addition a child’s parent or legal guardian must open a Junior ISA on behalf of a child. Alternatively a child aged 16 or over but under 18 can open one on their own behalf. Anyone can pay into a Junior ISA and the maximum amount that can be paid in during tax year 2022-2023 is £9,000.
Money held in a Junior ISA is owned by the child who the ISA has been opened for and they can manage the ISA on their own behalf from the age of 16. However, they are unable to access the funds until they are 18 except in exceptional circumstances.
Any money held in a Junior ISA is automatically rolled over into a normal ISA when the child reaches the age of 18. The ISA can be held as a Cash ISA or as a Stocks & Shares ISA. Your qualified financial advisor will help you to decide the best type of ISA based on individual circumstances and information available.
A unit trust is a collective investment where investors pool their money with each other to give you a stake in a selected investment. By investing in this way investors are able to build a more diverse portfolio of products this can help to ensure that you have the correct diversification across your investment portfolio. It also means that the investor does not have to pick their own individual investments which can prove to be costly. Here at PAB Wealth Management our financial advisors are experts in offering advice with regards to unit trusts.
Unit Trusts work by having a fund manager who purchases shares or bonds for the fund. The fund is split into units which investors can buy. The fund manager can create new units for new investors if demand is high and they wish to. Alternatively they can also cancel units if investors are selling.
Some funds will be actively managed. An actively managed fund has fund managers who will select the investments. The aim being for the fund managers to outperform the market so for example if the FTSE 100 increases by 5% in a year the fund manager will look to achieve growth of 6%. Because these funds are actively managed the costs associated are often higher, with the aim being that this can also lead to potentially higher returns if the fund manager makes the right investments.
Alternatively some funds are passively managed. Passively managed funds will track an investment index for example FTSE 100 tracker. The aim is for the fund to replicate the market rather than to try and beat the market. As an example if the FTSE 100 increases by 5% in a year the fund will also aim to increase by 5% in the year. Because they are tracking an index and are not actively managed the costs for passively managed funds are often cheaper. This does not mean that they will not perform as well as actively managed funds.
Returns can be received from Unit Trusts in two ways. Income Units – This is where any returns generated by the investment will be paid to you as an income. Accumulation – Any returns are retained and reinvested in the fund with the aim of increasing the value of your original investment. Income is taxable even if the gains made are re-invested within the unit trust. However, your dividend and personal savings allowances may be used to reduce any tax implication.
Your qualified financial advisor will look to assess your attitude to risk and will help you to decide if investing in Unit Trusts should be part of your financial plan moving forwards.
Investment bonds are medium to long term investments that are designed to produce capital growth. You can pay money in and take money out of bonds as and when you like. For most investors investing in investment bonds would normally only occur when they have used their annual ISA allowance as they are not as tax efficient as ISAs.
Investment bonds can often be used to help with trust and estate planning as well as being used to help pay for long term care. Most investment bonds will pay out a small amount of life insurance following death but they should be treated as investment products and not life insurance policies.
Both onshore(based in the UK) and offshore(international bonds are available. Both types of bonds have advantages and disadvantages especially in relation to taxation.
One advantage of investment bonds is that you can make withdrawals of up to 5% of the original amount invested annual without having to pay an immediate tax charge. The tax is deferred and is only payable when the bond is cashed in or matures. If no withdrawal is made in a year the 5% can be carried forward. So if you make no withdrawal in years one & two you could withdraw a maximum of 15% of the value of the original investment in year three. It should be noted that withdrawing more than the annual limit of 5% can result in a tax charge.
The deferral of tax that is available in relation to investment bonds can be especially useful for higher and additional rate taxpayers.
These types of investment are complicated and it is important to speak to a financial advisor to ensure that any investment you are planning to make is as tax efficient as possible. Your qualified financial advisor will look to assess your attitude to risk and will help you to decide if investing in Unit Trusts should be part of your financial plan moving forwards.
Investing for Income:
Long term investors looking for income, have been seeking alternative homes for their capital since the 2007 financial crisis. With low interest rates and high inflation the value of money held in savings accounts has been depreciating for a number of years. Investing for income has become more important than ever in recent years to help mitigate the impact of inflation and low interest rates.
PAB Wealth Management’s financial advisors offer a range of income solutions, investing across a range of asset classes, helping us to provide a diversified, personally tailored portfolio. With interest rates currently low, investors could consider alternative sources of income:
Fixed Interest – corporate bonds and gilts offer the potential for increased income in times of low interest rates.
Equities – while in the short-term equities can be volatile, history shows us that they have outperformed all other asset classes over the longer term and offer the potential for capital growth and rising income for investors.
Commercial Property – while the commercial property market offers an opportunity to achieve capital growth over the longer term, the primary return for investors is rental income. By securing long leases with financially secure tenants, commercial property could potentially offer attractive and sustainable income levels.
Diversification and risk management remain the keys to long-term success in challenging markets. By working PAB Wealth Management’s qualified financial advisors you will have access to investment expertise and the opportunity to invest across a range of different investment firms. Spending time with your financial advisor to assess if investing for future income is right for you is important. Our financial advisors will discuss with you making any investments that you may make as tax efficient as possible.
The value of an investment with PAB Wealth management will be directly linked to the performance of the funds selected. The value of units can fall as well as rise, and you may not get back all of your original investment.
A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Tax treatment is dependent on individual circumstances and may be subject to change in future. Tax planning advice is not regulated by the Financial Conduct Authority.