Axess Financial Services | Savings and Investments

It may be for a holiday, money for a rainy day, a special occasion such a wedding or a deposit for your first home, or for your children's future.

Before putting money away for any special purpose the first port of call is an emergency fund. We recommend that everyone should hold minimum of funds equivalent to atleast three month's net salary in an easily accessible account in the event of an unforeseen emergency. The best options for these are cash ISAs and cash based high interest bank accounts.

Then you come to regular monthly savings. With regular savings the first decision to make is the level of risk you are prepared to take for the potential rewards. The table below illustrate the various investment products available and their risk ratings. These varies from the Low risk Bank and Building Society accounts to the speculative very high risk investments such as commodities or physical items i.e. livestock or mineral deposits.

Investment Group	Investment Product	Rist Rating
Physical items, investments in novice businesses	Commodity futures, Unquoted Stocks, Penny Shares, gambling, Venture Capital Trusts, Single Company Stock,	Very High
Specialist unit trusts, Oeics & investment trusts in underdeveloped economies	Emerging Markets, Far East excluding Japan, South American Markets, High Income bonds	HIgh
Specialist unit trusts, Oeics & investment trusts in Developed economies	UK Smaller Company's Funds, North American Far East including Japan, Japanese Funds,European Equity Funds	Med/High
Mainstream unit trusts, Oeics & investment trusts	UK Equity Growth/Income Funds, Tracker Funds, Managed Funds, Distribution bonds, Corporate Bond funds	Medium
Low risk Bonds	With Profit Funds, Guaranteed income/ growth Bonds, Zeros	Med/Low
Cash	Gilts and Fixed Interest Bonds, Cash ISA, Banks/Building Society, National Savings	Very Low

1. Cash Based Deposits :
These are the safest forms of investments.

1.1. Gilts
These are a type of bond (a fixed interest security) backed by the British government and are considered low risk. Gilts are one of the ways governments borrow money. For the loan they pay a fixed interest called the coupon. As they are very safe, gilts tend to pay a lower rate of interest than other types of bonds. You can only loose your money if the British government goes broke. There are three groups: shorts - with a life of less than five years; mediums - with a life of five to ten years; and long-dated gilts with a Iife of more than ten years. Only gilts with a Iife of at least five years left to run can be put in an ISA. Some gilts are index-linked and provide a return linked to inflation, making them a good hedge against price rises.

1.2. Banks & Building Society accounts
With cash based accounts the interest rate is dependent on the accessibility. Immediate or short term access accounts pay a lower rate of income than a those that do not require immediate access e.g.. 6 months.

Tax Rate	Tax treatment
Basic-rate payers	Deducted at 20 per cent automatically from interest earned
Higher-rate tax payers	Meet their further tax liability through their annual tax return
Non - tax payer	Register to receive interest without tax deducted. You must still declare interest earned from savings on your tax return even if there is no tax to pay.

1.3. National Savings

Several different types of accounts are available

Product	Tax treatment
Five-Year Savings Certificates :, Interest that is tax-free and guaranteed. But must remain invested for the full term.	Interest is not as attractive as on ordinary accounts, but has the advantage of being guaranteed for the term. Tax-free status makes each 1 % = 1.25% for lower or basic-rate taxpayer; or 1.66 % for a higher-rate taxpayer.
Ordinary and Index-linked Savings Certificates	Tax - Free	image NI certifi
Children's Bonus Bonds	Tax - Free
First Option Bonds	Net of 20% tax
Ordinary account	First £70 of interest tax free
All other NS products	Tax paid gross

	1.4. Cash ISA Identical to Bank & Building society deposit accounts with no liability to income or capital gains tax payment on the interest. Maximum investment limited to £3000 per year per tax payer. (see ISA below)


	2.Low Risk Bonds These are single premium or lump sum investment products. Like all investment bonds, returns are taxed within the fund and basic-rate taxpayers have no further tax to pay on distributions.

2.1. With Profit Bonds
They are tax-efficient products, but are not tax free. Growth comes in the form of accruing bonuses by investing in the company's with-profit fund. An "income" can be withdrawn annually. However, it is important to remember the withdrawal comes from the capital invested. Unless you do not want to erode the original capital amount invested the withdrawal must be restricted to the annual bonus rate less any charges (annual management fees).

The growth comes in two forms; annual or reversionary bonuses when once applied cannot be taken away and the terminal bonus at the maturity of the policy. The bonuses will depend on the performance of the with-profit fund & returns from good years can be held back to be distributed in lean years and therefore to even out the bonuses and allow investors to get a consistent level of bonuses. It is important to consider how steady the bonuses have been with time for each provider. Unlike unit linked bonds the value can only increase.

There is no tax liability as long as the withdrawals average out to 5% of the original amount invested per year. If you withdraw greater than 5% only higher rate tax payers has a liability. Tax liability only occurs on encashment. Therefore by differing the encashment until falling in to the basic or lower rate e.g. after retirement, any liability can be avoided.

Market Value Adjuster (MVA)
An important element in the way with-profit policies work. This is only applied if the policy is cashed during a time of stock market weakness e.g. during a sharp and / or prolonged fall. The MVA will reduce the unit value of your fund by a certain % in such a time. This is primarily to protect the interest of remaining investors in the fund and is not always invoked. This can be avoided by postponing the encashment of the policy until the markets recover.

Financial strength
The financial strength of the policy provider is significant. Those with good cash reserves will be able to maintain better bonuses during market weaknesses, sizeable numbers of investors withdrawing from the fund and maintain healthy terminal bonuses on maturity.

Characteristics of With Profit Bonds : Risk rating : Low

Suitability	i. Not suitable for non-tax payers. ii. Cautious investors looking for an income stream with low risk within their portfolio. iii. Lower rate tax payers. iv. Higher rate tax payers who will fall in to the lower rate in the future (retirement). v. Inheritance tax planning : can written under trust to a third party. On death, the proceeds pass outside the estate tax-free to the nominated person. vi. Life insurance: policy will pay a lump sum on death.
Tax	Taxed within the fund at basic rate before distribution, hence no tax charge for basic rate tax payers; higher rate tax differed or on encashment
	higher rate taxpayer (HRT): liability for marginal rate (18% currently). However it can be differed as the liability is at encashment. Can withdraw up to 5% of original investment per year. HRTs need to declare on the tax return if more than 5% is withdrawn annually. No CGT
Charges	Most funds will have an initial charge or an establishment charge spread over five years of about 1- 2% in total and an annual management charge of 1%.
Early withdrawal penalties	MVA- depend on the provider
Income paid	Depend on the bond : monthly, quarterly, half-yearly or yearly.
Returns	Subject to bonuses if capital is not to be eroded.

Characteristics of Guaranteed bonds Risk rating : Low

Suitability	i. Not suitable for non-tax payers. ii. Cautious investors looking for an income stream with low risk within their portfolio. iii. Lower rate tax payers. iv. Higher rate tax payers who will fall in to the lower rate in the future (retirement). v. Inheritance tax planning : can written under trust to a third party. On death, the proceeds pass outside the estate tax-free to the nominated person. vi. Life insurance: policy will pay a lump sum on death.
Tax	Taxed within the fund at basic rate before distribution, hence no tax charge for basic rate tax payers. Cannot be reclaimed even for Non-taxpayers.
Charges	Most funds will have an initial charge or an establishment charge spread over five years of about 1- 2% in total and an annual management charge of 1%.
Early withdrawal penalties	MVA- depend on the provider ; could be heavy.
Income paid	Depend on the bond : monthly, quarterly, half-yearly or yearly.
Returns	Guaranteed at the start.

3. Medium Risk Bonds

3.1. Corporate Bond Funds.

What are corporate bonds ? : These are loan certificates issued by various companies. This is one of the ways a company can raise money for its business ventures (e.g. expansion & take overs) rather than borrowing from banks. The issuing company decides how much it wants to borrow, sets a competitive interest rate, then decides a maturity date when it will repay the loan. They pay a fixed rate of return, known as the coupon, making them suitable for those looking for a stable income. They have a fixed redemption date when investors' capital is returned.

They are not without risk, but a corporate bond unit trust offers the lowest level of risk for those interested in investing in different companies directly. Interest from different bonds are pooled together and paid as a single payment, either monthly, quarterly, six-monthly or yearly. Any corporate bond with at least five years to maturity can be held in an Isa, but not all Isa managers will accept individual corporate bonds because of the prohibitively high transaction costs.

The level of interest depends on the risk rating of the company. Those companies with greater financial strength and good credit rating will pay a lower rate than those without. These bonds can be divide in to two categories :
1. Investment grade or corporate bond funds : low interest paying. Categorised under UK corporate bond sector.
2. Sub-investment grade or high yield bond funds: used for giving a highest possible income. Categorised under UK bond sector.

The biggest risk is if the company falls in to financial trouble, when it may default on the interest payments and finally not repay the capital. Some funds enhance their returns by holding preference shares and convertibles, but can be more volatile.

Two independent rating agencies: Standard & Poor's and Moody's assess the risk levels of corporate bonds (and many other investment products).

Risk rating of Corporate Bonds
All bonds have a rating of between AAA and C, with the best bonds rated AAA.
Type	Company profile	Rating	Coupon*	Likelihood of default
Investment-grade	solid, blue-chip companies	AAA to BBB	Low	Low
Sub-investment grade (also called junk bonds)	Companies with low credit rating	below grade BBB	medium - high	Possible : where your original investment may not be returned.
*Coupon : interest/ dividends

Risk rating of Corporate Bonds
All bonds have a rating of between AAA and C, with the best bonds rated AAA.
Type	Company profile	Rating	Coupon*	Likelihood of default
Investment-grade	solid, blue-chip companies	AAA to BBB	Low	Low
Sub-investment grade (also called junk bonds)	Companies with low credit rating	below grade BBB	medium - high	Possible : where your original investment may not be returned.
*Coupon : interest/ dividends

Risk rating	Depend on yield and the quality of the underlying investment company ; higher the yield greater the risk
Suitability	i. Not suitable for non-tax payers. ii. Cautious investors looking for an income stream with low risk within their portfolio. iii. Lower rate tax payers. iv. Higher rate tax payers who will fall in to the lower rate in the future (retirement).
Tax	If held within an ISA no tax on the income or growth. Interest on a bond within an ISA carries 20% tax rebate compared to shares in an ISA. Taxed within the fund at basic rate before distribution, hence no tax charge for basic rate tax payers; higher rate tax differed or on encashment
	Higher rate taxpayer (HRT): liability for marginal rate (18% currently). However it is can be differed as the liability is at encashment. Can withdraw up to 5% of original investment cash year. HRTs need to declare on the tax return if more than 5% is withdrawn annually.
Charges	Often deducted from capital. Most funds will usually have no initial charge or an establishment charge. An annual management charge can be 1- 1.25%.
Early withdrawal penalties	Usually in the first five years - depend on the provider
Income paid	Depend on the bond : monthly, quarterly, half-yearly or yearly.
Returns	Subject to the quality of the bond fund.

3.2. Distribution Bonds

These are primarily used to generate an income from a lump sum investment in to a fund, the distribution fund. The fund will invest in various forms of investments from equities to gilts, cash and property. The returns in the form of dividends, interest and rent are siphoned off and distributed as an income.

The investment fund will have an equity or growth part and fixed interest or income part depending on the fund manager. Generally this is split 50: 50, but can be skewed one way or the other depending on what the manager's priority i.e.. greater income or security. Unlike with-profit bonds the value of the fund can fluctuate with the movement of equities, however, most managers will take a conservative investment strategy to ensure that the value of the investment does not fall.

Risk rating :Medium - subject to whether income or growth is important.
Suitability	i. Not suitable for non-tax payers. ii. Cautious investors looking for an income stream with low risk within their portfolio. As long as income above recommended is not taken. iii. Lower rate tax payers. iv. Higher rate tax payers who will fall in to the lower rate in the future (retirement).
Tax	Taxed within the fund at basic rate before distribution, hence no tax charge for basic rate tax payers; higher rate tax differed or on encashment
	higher rate taxpayer (HRT): liability for marginal rate (18% currently). However it is can be differed as the liability is at encashment. Can withdraw up to 5% of original investment cash year. HRTs need to declare on the tax return if more than 5% is withdrawn annually.
Charges	Most funds will have an initial charge or an establishment charge spread over five years of about 5% in total and an annual management charge of 1%.
Early withdrawal penalties	Usually in the first five years - depend on the provider
Income paid	depend on the bond : monthly, quarterly, half-yearly or yearly.
Returns	Usually 4-5%; subject to performance of fund manager

Distribution funds can also be acquired outside a bond structure as a unit trust and may have a clear advantage over their bond cousins for many. It comes from the way bonds and unit trusts are treated for tax. The distribution bond is treated as pure income, whilst the growth part and income part of the distribution unit trust is treated separately. The basic rate tax payer is still liable for the dividend and interest elements , but any capital growth is treated under CGT rules. As many basic rate tax payers do not fully utilize the annual CGT allowance; any growth can be offset against this effectively giving a 20% (approx.) better return with a unit trust.

3.3. Zero Dividend Preference shares
Considered less risky than ordinary shares, these pay a fixed dividend, decided on issue, payable before ordinary shareholders receive their dues. If the company falls into problems, preference shareholders are normally repaid before the ordinary shareholders. Some preference shares are known as convertibles as they can be converted to ordinary shares on a fixed date.