YOUR MONEY: Safety or good returns?
GIVEN so much uncertainty with the stock markets, and low rates of interest on bank and building society accounts, investors are looking for safe havens but improved returns on their money. There are a number of investments available that provide either guarantees or protection of capital along with varying degrees of income or growth.
You should however, read the small print because, while some may provide a safe haven, others can carry a high degree of risk. You need to determine which is most suitable for your circumstances. Even as an adviser it takes me time to sift through the different conditions, so don't be concerned if you find that it is all a bit of a minefield.
Always keep some money in an easy access deposit account to cover emergencies. It is important that you understand the risk associated with investments. Sometimes investments that look low risk can actually be high risk.
Guaranteed Income Bonds guarantee to return your money at the end of the term and will pay you a fixed return or income. There is no potential for capital growth and the rate offered will change in line with interest rates. Once you have invested in a Guaranteed Income Bond the in-come level will not change irrespective of what happens to interest rates.
Guaranteed Income bonds are usually not suitable for non-taxpayers as the interest is paid net of tax and cannot be reclaimed. The attraction to higher rate taxpayers is that the interest does not need to be grossed up as it does with ordinary deposit accounts.
Equity or Stock Market Bonds are issued by banks, building societies and insurance companies. Also known as High Income Bonds, these provide a fixed rate of income or growth over a period. Your capital is returned in full as long as the stock market performs in a certain way.
Some are linked to the FTSE 100, which reflects the prices of the largest 100 UK companies, others to the Dow Jones EuroStoxx 50 or the American NASDAQ or a combination of these or other indices.
The higher the fixed rate on offer, the tougher the requirement for the index to perform and the greater the likelihood that capital may not be returned in full.
There is often a ``safety net'', which means even if the index has fallen by a certain amount by the end of the term, you will not lose any money. But once it breaks the safety net, you can lose some of your capital. Some key questions are: # How long does the bond run for?
# To which index or indices is the investment linked?
# What is the growth or income rate?
# Is there a safety net and how much do I lose if the index falls through it?
# How and when are the indices measured for the end date?
# Can I have access to my money?
# What is my tax position? However bleak things look, there is plenty of choice for investors wanting to increase their income at a time when bank and building society rates are low to make their money work a little harder.
For further information on the subject please contact your IFA. If you do not already have an IFA call the IFA Promotion Consumer Hotline on 0800 085 3250. For a factsheet on high-income products visit www.fsa gov.uk / consumer.
Marlene Shalton is a director of independent financial advisors Chambers Morgan James