ISAs
What is an ISA?

An ISA is an individual savings account – a way of saving tax-free introduced by the Labour Government in April 1999, replacing Personal Equity Plans and Tax-Exempt Special Savings Accounts, in order to encourage more people to save. There are two main types of ISA saving – cash and stocks and shares ISAs – and which one you choose to make your ISA investment with is entirely up to you.

How does a cash mini ISA work?

Easy. A cash mini ISA is nothing more or less than an ordinary savings account, but with the considerable bonus that any interest earned in it is tax-free.

How does a stocks and shares ISA work?

These are stock market investments wrapped around by a tax-free ISA wrapper. Your ISA investment comprises elements like company shares and corporate bonds (basically IOUs from companies to which you lend money in anticipation of a higher return). Higher rate taxpayers do not have to fork out extra tax on dividend payments from shares held in ISAs. In short, you get all the returns (and risks) of the stock market up to set limits (see ‘limits’ question below) without having to pay tax.

Minis and maxis – what’s all that about?

It’s not a rerun of the great 1970s debate on skirt lengths – it’s the ISAs you can take out graded by the size of the saving and investment you can make in them. But Chancellor Gordon Brown conceded in his 2006 pre-Budget statement that the mini and maxi categories are confusing and that he will soon abolish them. For the time being, see the question below for the amounts each type of ISA can accommodate.

Tax-free saving sounds good to me – but are there limits on what you can save?

There most certainly are. If you are aged 16 or over you can put up to £3,000 in a cash mini ISA, and if you are 18 or over you can put up to £7,000 in a stocks and shares maxi ISA or £4,000 in a stocks and shares mini ISA. If you invest cash in a cash mini ISA you are permitted to take out only a shares mini ISA in the same tax year.

How popular are ISAs?

Chancellor Gordon Brown recently said that more than 16 million people in total have money tied up in ISAs and, by April 2006, £70bn was held in stocks and shares ISAs and £111bn in cash ISAs. These are pretty impressive figures, but there is still debate about exactly how effective ISAs have been in getting more people to save more money.

What is a self-select ISA?

These are ISAs used for sheltering individual shares, and for which stockbrokers charge a monthly or annual fee. They are usually held by more sophisticated investors, so take advice if this is the route you choose.

What is the best ISA for me to take out?

This is a ‘how long is a piece of string?’ question. There are literally thousands of ISAs in the market and you should use our handy comparison tool and Best Buy table to get the best ISA for yourself. Generally, you should look for ISAs – cash or stocks and shares ISAs – that make the best returns on your money.

Does it really matter if I take out more ISAs than I should in the same tax year?

Yes, it does really matter as you can be prosecuted by HM Revenue and Customs if you stray over the limit. If in any doubt, consult an independent financial adviser (IFA).

Are ISAs safe for the foreseeable future? Would they be abolished by a change of Government?

Chancellor Gordon Brown assured us in his 2006 pre-Budget report that ISAS were in “for the long haul”. He said that savers will be able to put money saved from maturing Child Trust Funds in 2020 into them, so that sounds encouraging. But Gordon Brown and his party may not be in power that long, so what would David Cameron or Menzies Campbell (or their replacements) do about ISA investment if they were elected?  The short answer is: no one knows.

INVESTMENTS
I’ve heard that investing in the stock market is only for the wealthy. Is this true?

No. It is absolute poppycock and the myth that only people who own country estates and Ferraris can undertake stock market UK investment is long past its sell-by date. Online share dealing, for example, allows anyone with a basic knowledge and a modicum of cash to participate in the markets. We can all be a stockbroker these days, although you should never risk more money than you can spare.

What is a share?

A share is literally a share in the fortunes of the company which has issued it. The value of that share will go up and down in line with the company’s performance or the market’s expectations of that company’s performance. Fund managers in the UK investment arena deal largely in shares (although other financial instruments are used) and try to build portfolios of winners. A good saving and investment strategy will combine shares with other assets like cash, bonds or property.

Can the movement of shares be predicted?

If only it could! The short answer is ‘no’, but investment firms spend millions on analysts and other experts who’d probably like to tell you that their efforts do allow you to predict share price movements. It’s nonsense, of course, and although expert analysis can help you analyse a company’s performance, and make informed guesses, it can never predict with 100% accuracy as the market is as much based on sentiment – what people feel will happen – as predictable mathematical formulae. Even a top stock picker like Fidelity’s Anthony Bolton, who has successfully run the Special Situations Fund there for over 25 years, would never claim to be able to predict share prices.

What is an investment trust?

An investment trust is a company that invests in the shares of other companies – and that is all it does. An investment trust is launched by making a share issue in the same way as any other company. Money raised by this share issue is then invested in a portfolio of shares (and possibly bonds or even cash). You own a percentage of the fund in direct proportion to the number of shares you have. The shares are bought and sold on the stock market, just like those of any other companies. Sometimes investment trust shares trade at a premium to the value of their underlying share portfolios (because people think those portfolios will do well). More usually, however, they trade at a discount to the value of their underlying share portfolios, as people have reservations or concerns about these. For more information about investment trusts as part of your saving and investment strategy, call the Association of Investment Companies on 020 7282 5555 or log on to theaic.co.uk

What is a unit trust?

A unit trust is a pooled investment fund, run by a professional fund manager. Most unit trusts use investors’ money to buy a wide range of companies’ shares. An Oeic (open-ended investment company) is similar to a unit trust, but you buy shares in an Oeic rather than units in a trust. For more information about unit trusts and Oeics  as part of your saving and investment strategy call the Investment Management Association on 020 7831 0898 or log on to investmentuk.org

What is a bond?

A bond is basically an IOU you get in return for loaning a company, or the Government, money. You will be paid interest on the bond (the coupon) and will receive the full amount (the principal) back on a pre-determined date (the maturity date). If you buy a company bond it is called a corporate bond; if you buy a Government bond it is called a gilt. You should consult an independent financial adviser if you want to buy and sell bonds.

I’ve heard a lot about hedge funds recently and the fantastic returns they seem to make? What are they and should I invest in one?

If you’re an average middle-of-the-road investor, using standard saving and investment products, then you will probably not be able to invest in a hedge fund as these funds are still the preserve of the very wealthy. Hedge funds are basically sequences of extraordinarily complex gambles on the way share prices and indices will move. One of their distinguishing features is their ability to ‘go short’ or, in plain language, bet on a price or index falling.

What are derivatives and are they worth a punt?

Derivatives are financial instruments derived from straightforward products like shares and enable investors to make gambles (calls) on the direction they think prices or indices will move. Many derivatives exploit inefficiencies and flaws in the market (called arbitrage) to take advantage of the profit margins found there. If you are a sophisticated investor there are retail products now available (like contracts for difference or CFDs), but you should consult an expert adviser before entering this highly speculative UK investment arena. Don’t forget that derivatives are normally highly geared products, which means excellent returns if you get it right, but loss of shirt (and everything else) if it goes against you.

If I lose all my money on stocks and shares, can I get my money back?

Unfortunately not, although reputable investment companies are governed by the Financial Services Authority (FSA) and there is redress if you are mis-sold investment products by properly regulated companies. Each case is different and you should refer to the FSA for guidance – fsa.gov.uk

I have recently been offered shares in an American bio-tech company over the phone. The salesman has promised a 50% return on my investment within six months. Is this too good an opportunity to miss?

It is for him! Too many people are mugged over the phone and pay good money for rubbish like this and it has no place in a sound saving and investment strategy. The salesman’s company is almost certainly based overseas (the Costa del Sol is a favourite spot) and he is basically working out of what is called a ‘boiler room’. Don’t touch this with the proverbial bargepole.

SAVINGS
I’m confused about the difference between an instant access savings account and a notice savings account. Can you enlighten me?

Certainly. When you come to compare saving accounts you will notice that the providers will make a distinction between these two categories, and they really just do what they say on the tin. An instant access savings account allows you immediate access to your money and will usually come with a cash card for instant withdrawals. A notice account, on the other hand, means you need to give the provider notice if you want to make a withdrawal, perhaps up to 90 days. Notice accounts usually pay more interest in exchange for the possible inconvenience.

Do I have to pay tax on the interest I earn in my savings account?

Unfortunately, you do. The bank or building society will deduct this automatically at the end of the year, so you don’t need to worry. If you want to avoid paying tax you should take out an ISA (see FAQs in the ISA section) as part of your saving and investment plan.

What’s the best rate being paid on a savings account at the moment?

You should use our Best Buy table to find out, but there is an important point here that deserves a mention. Providers quite often lure customers in with a good headline interest rate, and then cut that rate to an uncompetitive level some way down the line, which is bad for your saving and investment plan. Some others do not increase their rates when the Bank Rate is increased. Dutch savings bank ING has come in for severe criticism for failing to do this at the end of 2006. From being the top performer in the online savings account tables, ING slipped out of the top 10 because of its inertia.

What are National Savings Accounts?

The Government runs National Savings & Investments (NSI) and has done in various forms since 1861. This offers a commendably wide range of savings accounts and bonds, and it is as safe as houses if you don’t want to take too many risks with your savings and investment strategy. All of the products available guarantee your capital, so if this sounds right for you then get along to the post office and pick some leaflets or log on to ns&i.com

I was recently offered an endowment by a savings company, but I thought these were something to do with insurance. What’s the score? 

Endowments are part-life insurance and part-investment/saving products. They are sold by life insurance companies (usually via financial advisers), which is probably the type of firm that contacted you. They were popular in the late 1980s as products sold with interest-only mortgages and many people at the time were told they would repay their mortgages, with loads of money left over at the end of the term. But many didn’t do the promised job and consequently endowments have acquired a tarnished reputation. But they can still be part of a sensible saving and investment strategy and you should ask more questions, especially concerning charges, about the product you’ve been offered.

I want to open a savings account for my two children. How do I go about doing this?

Pretty well all of the banks and building societies offer special accounts for children and young people and there are some pretty bizarre gimmicks on offer to ‘help’ you make your choice. Remember the NatWest piggy banks? But the same advice as with any other savings account relating to a saving and investment strategy is pertinent here: thoroughly research the options available and pick the account with the best savings rate.

What is a Child Trust Fund and how can I get hold of one?

All children born after 31st August 2002 receive a voucher from the Government worth £250. This can be used by a parent or person with parental responsibility to open a Child Trust Fund (CTF) account, which can be rolled into an ISA in 2020, according to Chancellor Gordon Brown, which is a commendably long-term saving and investment strategy. Over 40 banks, building societies and other financial institutions are approved to provide CTFs.

I have been asked by a neighbour if I want to join a Christmas gift savings plan. It sounds like a good idea to save money for the festive season, but how wise is it?

If you look at the recent crash of Christmas savings club Farepak, and the widespread misery that caused, you should be very wary indeed about joining such a club. Many local shops, like independent butchers and greengrocers, run savings clubs and these are usually fine, unless you think they are getting into financial trouble. All of the people who lost money with Farepak would have been better off to compare savings accounts and put their cash into an instant access savings account or National Savings product.

Someone told me that Premium Bonds are a good way of saving, but I thought they were something to do with gambling, like the Lottery. Are they really a savings product or just a flutter?

They’re both, but in a positive way. Premium Bonds, run by NSI, are inextricably linked to Ernie (Electronic Random Number Indicator Equipment) and each month a prize draw is made, with one bondholder becoming a millionaire and lots of subsidiary cash prizes won. But unlike the Lottery you don’t waste any money entering the draw, as your Premium Bond is actually a savings bond and can be part of a sound saving and investment strategy. This is saving with a dash of excitement added.

If I leave my savings in a savings account does the value of my money go down?

This is a very good question and in many cases the answer is ‘yes’. Inflation, currently running at more than 2.5%, will eat into the value of your savings and undermine your savings and investment strategy, if the interest paid on your account is lower than that figure. In many cases it is lower and it makes sense to always check out the rates being offered on savings accounts and move your cash to better paying ones for maximum returns. A good savings and investment strategy should always involve a degree of flexibility.

PENSIONS
I’m retiring next year and have only the basic State pension to look forward to. What will I get?

That depends entirely on how long you have paid in for and your individual circumstances. In 2006-07 the full State pension is £84.25 a week and a man has to be 65 to qualify (60 for women, rising to 65 by 2020), but there is a qualifying period you need to have paid in for. The Pension Service will automatically send you a claim form four months before you reach State pension age. If you do not receive one, call The Pension Service on 0845 60 60 265 for pension advice or a State Pension Forecast. Alternatively, for more information you can log on to www.direct.gov.uk

What happens if I do not qualify for the full basic State pension?

If you don’t qualify for the full basic State pension, but have 25% or more of the qualifying years, you will receive a State pension between the minimum (£21.06 in 2006-07) and the maximum (£84.25 in 2006-07). If you have fewer than 25% of the qualifying years you are not normally entitled to receive any basic State pension. See contact details above for more information and pension advice.

I’ve been told I might be eligible for Pension Credit. What is this?

If you are aged 60 or over and living in Great Britain, the Government’s Pension Credit could top up your weekly income to a minimum of £114.05 if you are single, or £174.05 if you are a couple. See contact details above for more information and pension advice.

What is the State Second Pension and how do I make a claim for it?

The Second State Pension (S2P) is also known as the additional State pension and is paid on top of the basic State pension. It evolved from the State Earnings-Related Pension Scheme (SERPS) and gives a more generous State pension to low and moderate earners, and certain carers and people with long-term illness or a disability. See contact details above for more information and pension advice.

I’m 26 and have been recommended to take out a personal pension. What is this and why do I need one if the State will look after me when I’m retired?

If you think the figures quoted above in answer to the questions about the State pension constitute being ‘looked after’, then you’re a very tolerant person. Personal pensions are for those who do not have access to a company pension scheme and who do not fancy the baked beans on toast diet that the State provides for your old age. Basically, you take out a personal pension with the provider of your choice, your contributions attract tax relief at the highest rate you pay, and contributions are subject to a maximum limit by the taxman depending on your age. As this is a vitally important part of your financial planning you should see an independent financial adviser (IFA) for pension advice before you choose a personal pension.

Does it cost me to take out a personal pension plan?

Unfortunately, yes. If you see an adviser they will get commission for selling you the plan and this comes out of your contributions, especially in the early years. There is a lot of debate about this in the industry, and many observers believe that the people who give you pension advice, and then sell you a pension, should not be rewarded with money that would do better in your own pension pot  The investment company that manages your money will also levy annual charges. It’s a sad fact that there is no such thing as a free pension and, indeed, many argue that they are expensive products.

When can I get my hands on the money in my personal pension fund?

It’s not quite as easy as that, as this is not an instant access savings account and to a large extent your money is ‘locked’ into your personal pension. When your nominated retirement age arrives (say, 60), you are entitled to take 25% of your pension pot as a tax-free lump sum. The rest must be used to buy an annuity – an investment product that will pay you an income for as long as you live. There have been many Government discussions about changing this system, but it is still with us at time of writing and any good pension advice must factor in this stage of the process.

My dad, who’s in his sixties, had a final salary pension scheme, but my job only offers a money purchase pension. What’s the difference?

Your dad’s generation was arguably one of the luckiest when it came to pensions, as when he started work many jobs (which were for life) came with a safe-as-houses final salary pension scheme and no one really needed pension advice. Basically, it meant that in exchange for your contributions you got a percentage of your final salary as a guaranteed pension. In these schemes employees usually paid in 5% and employers 10%. As all good things must end, and people are living a lot longer these days, employers have moved to money purchase pension plans, where your pension fund grows at the whim of the investment markets. There are no guarantees and in most money purchase schemes employers and employees both pay in about 5%. But money purchase schemes are more flexible and portable, so for those on the move or wanting a career break they can be more convenient.

Is there any way I can boost my occupational pension contributions to improve my retirement income in the future?

Yes, you can make additional voluntary contributions (AVCs) to your company scheme up to certain limits, or go it alone with free-standing additional voluntary contributions (FSAVCs) with a plan of your choice run by any provider you want. It is best to seek pension advice when you are boosting your pension pot in this way.

If an occupational pension scheme fails, how do I get my money back?

This is a vexed question and many people in recent years have had their pensions withdrawn or axed just as they were coming up to retirement. Despite the existence of a Pensions Ombudsman (currently David Laverick) many people have had to fight hard through the courts to get redress in this situation – and they have not all been successful. In the event of company insolvency, as occupational pension schemes are set up under trust, the assets are protected from an employer’s creditors, unless the employer has contributed to the scheme whilst insolvent. A trust, however, cannot protect the value of investments. Therefore, if parts of the assets are invested in the employer’s business, and the employer becomes insolvent, the trust does not protect the market value. In short, you could lose your pension, as many have found to their cost. For more on this and other occupational matters go to www.pensionadvisoryservice.org.uk