dt skipton guide

8/2/2019 DT Skipton Guide

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GUIDE TO

SIPPsBY IAN COWIE

Mi e

m

r meBy Ian Cowie

IN ASSOCIATION WITH

PROVIDER OF


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The right o Ian Cowie to be identied as the author o this workhas been asserted by him in accordance with the Copyright,Designs and Patents Act 1988.

All inormation correct at time o going to press, February 2008.

The opinions and inormation presented in this documentare those o The Daily Telegraph and are not necessarily thesame as those which would be presented by Skipton FinancialServices Limited or FundsNetwork.

While Skipton Financial Services Limited and FundsNetworkare associated with this document, neither party acceptsresponsibility nor liability or the content o this guide.

The FundsNetwork logo and the FundsNetwork aretrademarks o FIL Limited.

This document does not constitute nancial advice underthe Financial Services and Markets Act 2000. We wouldrecommend that you seek appropriate proessional advicebeore taking any action based on the content o this document.

This guide is printed on paper with 55% recycled content. The carbon emissions have been

measured, reduced and oset or every part o the production process including 1.961 tonnes o

CO2 released when the paper or this guide was manuactured. www.responsibleprint.ino


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CHAPTER ONE INTRODUCTION

CHAPTER TWO RISK AND REWARD LADDER

CHAPTER THREE WRAPPERS TO BOOST RETURNS

CHAPTER FOUR FLEXIBLE AND EFFECTIVE INVESTING

CHAPTER FIVE CONCLUSION

CONTENTS


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The reason is that there are many dierent orms

o nancial assets and ways to use them. There

is no single answer that is right or everyone;

even the same individuals needs and objectives

will vary over time. So, or example, a sensible

strategy to make the most o your money whenyou are in your thirties will be very dierent

rom what suits you in your ties or sixties.

This guide is intended to help savers and investors assess strategies

or accumulating, preserving and enjoying wealth. That involves

understanding the advantages and disadvantages o dierent ways o

storing value, beore making inormed decisions about the best way

orward or you.

What do you Want?

It helps to have a clear idea o what your objective is beore you set o

to get there. For example, do you require income or capital growth rom

your savings and investments or a mixture o both? Most investors who

are in ull-time employment will seek capital growth but the emphasis

may tend to shit toward capital preservation as they near retirement,

ater which obtaining income is likely to be a priority.

Introduction

ChaPtER onE

I b . M pepe re rprie , we

e fci ier w b i

ieme, e wer wi bei wi erie

qei b e iii er r ier i

ree i r er mi circmce.

1


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Whatever your objective, it makes sense to beware o two potentialpitalls that trip up many o the unwary; infation and taxation. The

real value or purchasing power o money will matter more than

its ace or nominal value by the time you come to enjoy the ruits

o saving and investing. So it is important to remember that even

guarantees to repay 100 per cent o your capital in uture may be

eroded by infation. For example, even at the current modest rate o

annual increase in the Retail Prices Index o 4.2 per cent (October,

2007), the value o money will halve in just over 17 years which is

less than the average lie expectancy o pensioners retiring today.

So it is important to keep an eye on real returns that is, in excess

o infation as well as nominal or ace value security or saety.

Similarly, it is important to ensure that you reap the benets o saving

and investment rather than the taxman. That is why it makes sense to

consider holding assets in tax-ecient wrappers, such as individual

savings accounts and pensions.

INTRODUCTION

2


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INTRODUCTION

3

WhERE do you dRaW thE lInE?

Rising numbers o people seek to do well by doing good through

ethical investment. Moral concerns can be combined with monetary

returns in many dierent ways, ranging rom unds which avoid shares

in alcohol or tobacco companies to others which actively invest in

companies that set out to protect or improve the environment.

Your money can make a dierence now that billions o pounds are

allocated to socially responsible investment strategies. There has

never been a wider range o ethical investments to choose rom.

Whether any o them is right or you and i so which one to

choose will largely depend on your priorities, which your adviser will

be happy to discuss with you. The City has certainly come a long way

since, more than 20 years ago, brokers dubbed the rst ethical unit

trust as the Brazil und because you had to be nuts to invest in it.

WhICh Is Most IMPoRtant to you; RIsk oR REWaRd?

Beore considering which stores o value or types o asset might be

best or your money, you should ask yoursel what your priorities are.

Is it most important that you can be sure o getting back every penny

whenever you want? I so, you should stick to instant access bank or

building society deposits even though, as mentioned earlier, infation

is likely to erode their real value or purchasing power over time.

Alternatively, are you willing to accept some degree o uncertainty

or the risk that you might get back less than you invest in the hope

that this may provide greater income and growth than deposits can

provide? I the answer to that question is yes then a wide range o

possibilities ranging rom guaranteed bonds with not much more

risk than deposits, through to investments taking high risks in pursuit

o high rewards is opened up or your consideration.


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hoW long havE you got?

One o the most important questions to ask yoursel beore considering

dierent ways to make the most o your money is how long you can

aord to remain invested. I, or example, you are likely to need to

get back into cash in less than ve years, it would be prudent to stick

to bank or building society deposits or guaranteed products with

xed terms that t your investment time horizon.

Alternatively, i you are willing to commit money or ve years or

more, it may make sense to consider assets whose price can fuctuate

that is, rise or all but which have tended to provide higher returns

than deposits over most periods o ve years or more. The reason is

that, i you can aord to remain invested, short-term setbacks in price

may be less important to you than medium to long-term returns. But

it would be oolish to put your money into anything that keeps you

awake at night with worry. The next chapter describes how various

assets display dierent advantages and disadvantages and where

they sit on the risk and reward ladder.

INTRODUCTION

4


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Risk and RewardLadder

ChaPtER hEadIng

lw ri ieme e prce reie w rer,

wie e eei ier rer m w ie

ier eree ri.

5

INTRODUCTION

Those simple acts are well worth remembering

beore putting your money into any savings or

investments. Equally, you should be suspicious

o any investment which purports to break

those rules; when something looks too good

to be true, it may turn out not to be true.

While those aspects o what is sometimes called the risk and reward

ladder are widely-understood, ewer people understand why there

may be risks involved in a strategy o avoiding any investment with

an element o risk. The corrosive eect o infation is one explanation

but history also strongly suggests that accepting some degree o

disciplined exposure to risk may produce higher returns over the

medium to long term; that is, ve years and more.

dEPosIts; thE FIRst Rung oF thE

RIsk and REWaRd laddER

Bank or building society deposits and some National Savings &

Investments (NS&I) products can be regarded as the rst rung o the

risk and reward ladder. They guarantee to return your capital or the

original sum invested and to pay you interest so you can be certain

o getting back what you invest, plus something on top.

Bank and building society deposits are also protected by a statutory saety

net which, in the unlikely event that one o these institutions becomes

ChaPtER tWo


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unable to meet its obligations, guarantees 100 per cent compensation upto 35,000 per individual saver or 70,000 per couple in the case o joint

accounts. NS&I is backed by the British Government.

That high degree o certainty makes bank and building society

deposits and some NS&I products an attractive home or money

you may need to get access to in a hurry or where you cannot aord

to take any risks. However, as mentioned earlier, even at the current

rate o infation the real value or purchasing power o money wouldbe halved in little more than 17 years. So, to preserve the real value

o your savings and investments or to set out to make them grow it

makes sense to consider other stores o value which have tended to

provide higher returns in the past.

stRuCtuREd PRoduCts; onE Rung uP FRoM dEPosIts

A low-risk way to gain access to assets such as bonds and shares

discussed below which oer the potential o higher returns than

deposits without accepting all the risks involved in direct investment

in bonds and shares is provided by structured products. These are

usually linked to a stock market index or a collection o share

prices such as the FTSE 100, which tracks movements in Britains

hundred biggest companies shares, or the FT All Share, which tracks

more than 800 companies share prices. Most structured products set

out to provide a capital gain at a xed date in the uture but somepromise to deliver a xed amount o income or a xed period; in

both cases it is wise to remember that no promise can be worth any

more than the company which issues it.

Structured products usually promise to protect the original sum

invested provided the investment is held or a xed period most

oten set between three and six years. However, some structured

products will not repay the ull original investment i the index to

which they are linked alls by more than a xed amount. It is important

to understand that ew structured products are guaranteed that is,

backed by a guarantor and most rely on nancial derivatives, such

RISK AND REWARD LADDER

6


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7

as traded put and call options. It is also important to understandthat ew structured products pass back to the investor the income

produced by shares in the index to which they are linked this is

currently worth more than 3.1 per cent net o basic rate tax rom the

FTSE 100 and there are dierent levels o hard and sot protection.

It is important to discuss these actors with your nancial adviser and

to remember the undamental rule; the higher the potential returns,

the higher the risks are likely to be.

Bonds; MoRE RIsk than dEPosIts WIth MoRE CERtaInty

than shaREs

Much conusion is caused by the use o the word bond to describe

a wide variety o investments including, or example, guaranteed

equity bonds or a orm o structured product. However, bonds issued

by countries or large companies have advantages or income-seeking

investors who are willing to accept more risk than is the case withdeposits but who require greater certainty than shares can provide.

The reason is that most corporate bonds and those issued by countries

which are called gilts or gilt-edged stock when issued by the British

Government promise to pay a xed sum o income or a xed period

until the original ace value o the bond will be paid to the holder

when they mature or reach the redemption date.

For example, Treasury 8 per cent 2013, promises to pay 8 per 100o ace value or nominal stock held each year until 2013 when the

Treasury will pay 100 or each 100 o this gilt held. However, the

income obtained by investors ater the date o issue depends on the

price at which the bond can be bought on the Stock Exchange and

this fuctuates. For example, because interest rates elsewhere at present

are lower than 8 per cent, you would need to pay 116.70 to buy 100

nominal stock or ace value o this gilt at the time o writing. Because

buyers today will still only be paid 8 annual income or every 100

o nominal stock, then the fat or running yield on this gilt alls to 6.85


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8

per cent. I you also take into account the act that buyers today can becertain o losing 16.70 o every 116.70 they invest i they hold to the

maturity date when they will be repaid 100, then the redemption yield

on this gilt alls to 4.67 per cent.

All xed interest bonds are subject to what is sometimes called market

risk that is, the chance that rising interest rates elsewhere will make

the xed interest oered by these bonds less attractive, pushing down

the price they will etch on the Stock Exchange, or that rising infationwill reduce the real value o their xed income and their capital

repayment on redemption. Potential investors in bonds should also

beware o specic risk that is, the risk that the country or company

which issues the bond may ail to honour its promises and deault on

interest or capital payments. Bonds can pay more income than deposits

but they are not risk-ree.

shaREs; MoRE RIsk than dEPosIts oR Bonds WIth noPRoMIsEs FRoM IssuERs But a hIstoRy oF hIghER REtuRns

Companies which issue shares oten called equities make no

promises to pay any income or capital to investors. Instead, they oer

investors a share or stake in the ownership o the company which issues

them and they may pay income in the orm o dividends, although some

companies do not do so. Investors who wish to get their money back

must sell their shares on the Stock Exchange because the companieswhich issue shares make no promise to repay capital. Put like that,

shares may sound very unattractive and they are a risky investment

but equity investors own the companies which produce economic

growth. So, as invention and improvements in eciency tend to cause

the economy to grow over time, shareholders should benet rom that.

I that sounds theoretical, then look at what happened in practice.

Barclays Capital, a subsidiary o the high street bank, measures returns

rom deposits, bonds and shares since 1899 and updates its ndings

each year in its Equity Gilt Study. Dening shares as those which


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9

refected the changing composition o the London Stock Exchange,Barclays calculated that 100 invested in shares in 1899 would have

rolled up assuming gross income was reinvested into more than

1.5 million by start o 2007, compared to less than 20,150 had

the same sum been invested in gilts over the same period or less

than 17,900 on deposit. I the illusory eect o infation over that

period o more than a century is stripped out, then the real return

rom shares was just over 25,000 while gilts lagged behind with less

than 330 and deposits turned 100 into less than 290.

How historically shares beat bonds and deposits

While the past is not a guide to the uture, it was also interesting

to see what happened over much shorter periods. For example,

shares beat deposits and bonds over three quarters o all the ve-

year periods during that 107-year sample. The table Probability

o Shares beating Deposits and Bonds compares returns rom these

three stores o value over dierent periods o consecutive years. So,

Source: Barclays Capital Equity Gilt Study 2007.Past perormance is not necessarily a guide to the uture.

10

100

1,000

10,000

100,000

1,000,000

10,000,000

1899 1906 1913 1920 1927 1934 1941 1948 1955 1962 1969 1976 1983 1990 1997 2004

Equities Gilts Cash


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or example, where money was only committed or two years, sharesbeat deposits two thirds or 67 per cent o the time or, put the other

way round, there was a risk o nearly one-in-three that deposits would

do better than shares over any two-year period. As the table shows,

the risk o shares underperorming tends to diminish as the period o

investment is extended. O particular relevance to parents choosing

where to invest Child Trust Funds which cannot be encashed until the

child reaches 18 years, there was just a 1 per cent chance o deposits

beating shares over that period. But the act remains that share prices

can and do all without warning and you may get back less than you

invest. Being able and willing to invest over the medium to long term,

in order to lessen the chance that personal circumstances may orce

you to sell during a temporary stock market setback, is just one way to

reduce the risk inherent in shares. The next chapter deals with other

simple and eective ways to minimise risks and maximise returns.


10

Probability o shares beating deposits and bonds

Number o consecutive years 2 3 4 5 10 18

SHARES v DEPOSITSOutperorm deposits, no. o periods 71 74 77 77 91 89Underperorm deposits, no. o periods 35 31 27 26 7 1Total no. o periods 106 105 104 103 98 90

Probability oshares outperorming deposits 67% 70% 74% 75% 93% 99%

SHARES v BONDSOutperorm bonds, no. o periods 74 80 81 78 81 82Underperorm bonds, no. o periods 32 25 23 25 17 8Total no. o periods 106 105 104 103 98 90Probability oshares outperorming bonds 70% 76% 78% 76% 83% 91%

Share perormance compared to deposits and bonds over 107 years.Source: Barclays Capital Equity Gilt Study 2007.These fgures reer to the past and are not a reliable indicator o uture results.


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They enable individual investors o all sizes to

spread their money over dozens o dierent

companies shares or bonds or other assets

such as commercial property and reduce

exposure to setbacks or ailure at any one

company. The idea is the same as the amiliaradvice not to put all your eggs in one basket.

International pooled unds extend the principle o enabling investors to

gain exposure to assets in countries which ew individuals could buy and

sell directly in a cost-eective manner or with sucient risk control.

Some unit trusts and OEICs set out to automatically replicate stock

market indices such as the FTSE 100 or All-Share in Britain or

the Dow Jones or Standard & Poors 500 in America and theseare called tracker unds. However, most unit trusts and OEICs are

actively-managed by proessionals who set out to pick the shares,

bonds or other assets which they believe will produce the most

growth in capital values, income or both. Both passively-managed

tracker unds and actively-managed stock-picking unit trusts and

OEICs enable individual investors to share the costs o proessional

und management. You can get on with making a living or enjoying

retirement while a dedicated team o und managers set out to make

sure your money is put to work eectively.

Wrappers toboost returns

ChaPtER thREE

Pe , c i r pe-ee ieme

cmpie (oEIC), prie cep ceie w

imii ri b ierifci.

11


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WRAPPERS TO BOOST RETURNS

12

taX-FREE REtuRns FRoM Isas

There is little point in saving or investing i too much o your hard-

earned money is absorbed by tax. Fortunately, HM Revenue &

Customs still allows some very generous tax shelters or savers and

investors as well as positive incentives to encourage thrit and

provision against an uncertain uture and the probability o a much

pro-longed old age. Individual savings accounts (ISAs) which

replaced personal equity plans (PEPs) or new investments o upto 7,000 per adult in the tax year which ends on April 5, 2008,

and up to 7,200 per person in the year to April, 2009, are the most

fexible o these tax shelters. There is no minimum period or which

an ISA must be held to earn its tax advantages nor any minimum

age beore wealth can be withdrawn rom an ISA. Up to 3,000 per

person can be saved risk-ree and tax-ree in a deposit-based ISA

during the year to April, 2008, or up to 3,600 per person during the

year to April, 2009. This type o ISA is simply a wrapper that renders

bank or building society deposits tax-ree.


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13

Alternatively, up to 7,000 per person during the year to April, 2008,or 7,200 in the year to April, 2009, can be invested in stock market-

based ISAs, which can hold shares, bonds, commercial property or

unit trusts and OEICs holding these assets, in a tax-ecient manner.

Income and/or gains rom bonds or bond unds held in ISAs are

entirely tax-ree. While 10 per cent tax is deducted rom dividends on

shares at source and cannot be reclaimed by ISA managers, no urther

tax need be paid on share-based income received by ISA investors

a saving o most benet to higher rate taxpayers. No Capital Gains

Tax (CGT) need be paid on any prots rom assets held in ISAs; nor

need these assets be declared in tax returns. For most substantial

savers and investors, the problem with ISAs is that the annual limits

are set airly low and you cannot go back to make use o earlier years

ISA allowances that you did not use at the time. So it really is a case

o use them or lose them when it comes to annual ISA allowances

and it makes sense to consider utilising the opportunities to buildunds in this tax shelter as and when they arise in a disciplined and

methodical manner.


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taX InCEntIvEs to savE FoR REtIREMEnt

Pensions oer by ar the most generous tax incentives to savers

indeed, HM Revenue & Customs estimates that pension tax breaks

cost the Treasury about 17 billion a year. Are you and your amily

making sure you get your share? These enable everyone including

children and non-taxpayers such as non-earning spouses to receive

incentives equal to the basic rate o income tax to boost the value o

payments into pension plans. So, or example, everyone who pays80 into a pension can increase the value o that pension by 100

beore costs are taken into account because the government puts in

the extra pounds in tax relie. Higher rate taxpayers can achieve the

same eect by paying 60 into their pension. Various limits apply

or example, children and non-taxpayers can receive tax relie on

gross contributions o no more than 3,600 a year and everyone else

is limited to receiving tax relie on contributions o no more than 100

per cent o the individuals annual gross income or 225,000 in the

year to April, 2008, whichever is less.

A ortunate ew will also need to keep an eye on the lietime allowance

or maximum cap on tax-ecient pensions which is currently set at

1.6 million. However, most people are more likely to be aected

by relatively recent improvements in pension rules fexibility. For

example, since April, 2006, everyone aged 50 or older has been

allowed to draw tax-ree cash or any purpose out o pensions equal

to up to 25 per cent o the und without needing to change jobs or

retire rst. The tax-ree cash allowance has been extended to include

pension und top-ups called Additional Voluntary Contributions

(AVCs) and ree-standing AVCs (FSAVCs) and protected rights

pensions unded by opting out o what used to be called the State

Earnings Related Pension Scheme (SERPS) and is now called the State

Second Pension or S2P. People aged 50 or more or 55 or more aterApril, 2010 can draw tax-ree cash equal to up to a quarter o any

o these pension unds.


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15

Another important improvement in the attractions o pensions is thatthe old compulsion to invest at least 75 per cent the und in an annuity

or guaranteed income or lie has been relaxed. Instead, savers can

keep their pension invested in stock market-based unds and draw

an income rom them, subject to certain limits, in what is called an

unsecured pension or income drawdown plan. One way to access

these new opportunities and take control o how they are managed is

a Sel-Invested Personal Pension or SIPP. Since April, 2006, everyone

including members o occupational or company pension unds

can set up a SIPP and have as much or as little o a hands-on role in

building their retirement und as they wish. This important extension

o investors fexibility in making the most o their money will be

examined in more detail in the next chapter.


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tIME not tIMIng

Despite the tried-and-tested ability o dierent types o pooled unds

to oer exposure to the potential rewards o stock markets here and

overseas with a disciplined approach to managing and reducing

their inherent risks, many investors remain rightly concerned

about volatility. As mentioned earlier, stock markets have recently

demonstrated the act that prices can and do rise and all without

warning. Many people are unwilling to take the risk that hard-earnedmoney may all in value and so deer or delay investment in stock

market-based unds in the hope that one day it will obviously be the

right time to buy. That day will never come because nobody rings

a bell at the bottom o the market. While it would be nice to know

when share prices or stock markets had reached their absolute low-

point, such absolute certainty is sadly never available.

Despite shares historical probability o providing higher returns thanbonds or deposits over the medium to long term as described in the

previous chapter nobody can be sure what a share price or stock

market index level will be next week, next month or next year. O

course, that does not matter i or example you are investing to

und retirement but do not expect to retire next week, next month or

next year. The same holds true i you are investing to repay a mortgage

debt or or any other medium to long term objective. For these people,

the risk o attempting to time the market is that they may miss the

days when prices rise without warning which oten occurs just ater

pessimism was most widespread. For example, Fidelity Investments

one o the biggest und managers in the world calculates that


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17

1,000 invested continuously in the FTSE All-Share during the 15years to the time o writing would have grown to 3,450. By contrast,

i the same sum had been held in cash rather than shares on just

the 40 best days or the market over that entire period or less than

three days a year in which share prices rose most then it would

be worth just 985. Even bigger losses would have been suered

by investors who missed the turning points in overseas markets. This

research tends to suggest that time not timing is the least risky way

to increase rewards rom stock market-based investment.

gaInIng FRoM volatIlIty

One practical way to reduce the risk o bad timing that is, the

possibility that you might buy beore prices all is to set up a

regular savings scheme to drip-eed your money into assets whose

prices may rise or all without warning. Many unit trusts and OEICs

will accept regular monthly investments o as little as 50 with norequirement to maintain payments or penalties i investments cease

or are suspended. Regular investment can even help investors benet

rom share or unit price fuctuations through a phenomenon known

as pound cost averaging.

What this means in practice is that xed investments at xed intervals

or example, monthly will buy ewer units or shares when prices

are higher and more units or shares when prices are lower. So,provided the unit or share price fuctuates during a period o xed

regular investments, the average price paid or the units or shares

bought during that period will be marginally lower than their average

price during the period o investment. However, the main advantage

o regular investment is to reduce the worry o attempting to time

the market and instead instil a disciplined approach to attempting to

build an investment portolio.


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BEnEFIts oF a BalanCEd aPPRoaCh

The undamental principle o diminishing risk by diversication which

most pooled unds provide should be considered when deciding which

unit trusts or OEICs to hold in your ISAs, SIPPs or other investments.

The correct asset allocation or each individual will vary, depending

on his or her requirements or reward or example, are they seeking

income, growth or a mixture o both and their individual attitude

to risk. So, or example, a pension und investor with more than veyears to go beore retirement might hold a higher proportion o shares

and share-based unds than an investor about to enter retirement who

might require the greater capital security and higher immediate income

provided by bonds, bond-based unds and deposits.

Many investors nd it useul to discuss asset allocation with a whole-

o-market nancial adviser who can recommend unds rom across

the whole range o the marketplace, rather than just one provider,and should regularly review their progress. For example, at least once

a year it makes sense to monitor returns rom the unds you hold in

your ISAs, PEPs and SIPPs or other pensions and investments, with

a view to considering whether their perormance is adequate and

whether or not you should reallocate any o your assets. O course,

there are practical diculties as well as costs involved in buying

and selling assets. But new opportunities called und platorms or

networks, which are like supermarkets or investments, make it easier

and more cost-eective than ever to allocate assets to make the most

o your money. These options are the subject o the next chapter.


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As we have seen, your priorities might shit

rom capital accumulation when you are

younger to generating income when you are

older. Unortunately, dealing directly with

several dierent und managers will generate

paperwork, additional costs, take time and

may not even produce inormation which is

up-to-date and easily comparable.

Fortunately, und platorms or networks can provide fexible and

eective solutions to all those problems. They are like nancial

supermarkets where you can buy unit trusts and OEICs rom a wide

range o und managers and hold them in tax-ree wrappers suchas ISAs, PEPs and SIPPS or other orms o pension. Leading und

networks will give you access to more than 900 unit trusts and OEICs

rom more than 50 dierent und management companies, bringing

together all the inormation you need about your investments in a

single, up-to-date statement. Fund networks or platorms make it easy

to compare perormance, reallocate assets or switch unds where you

wish and cut costs.

Flexible and eectiveinvesting

ChaPtER FouR

n ie mer i ie be be r re, b,

cmmerci prper epi e ime e e

remi e be mer cr e e m wi

cce ri e cre r ieime.

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Why Pay MoRE than you nEEd to?

Fund managers ees and other costs can reduce the amount o your

money which is working or your benet when you invest. Contrary

to what you might expect, investment is not an area where you will

necessarily pay less in ees and other costs i you go direct and buy at

the actory gate. The reason is that unit trust and OEIC und managers

who deal direct with the public oten impose initial charges o about

5 per cent o the sum invested in order to cover marketing and othercosts entailed in dealing direct. By contrast, some whole-o-market

nancial advisers and und network or supermarket providers will

rebate or pass on to the investor all o the commission paid to them

by und managers, so that investors through these platorms pay no,

or very low, initial costs.

FLEXIBLE AND EFFECTIVE INVESTING

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21

As a result in many cases, 1,000 o every 1,000 invested by theindividual is put to work or his or her benet and the nancial

intermediary or und network is remunerated by means o trail

commission, usually equal to about 0.5 per cent per annum o

the value o these unds. It is important to understand that the trail

commission paid by und managers to intermediaries is not available

to investors direct and is paid or out o annual management ees

levied on unit trusts and OEICs which usually amounts to between 1

per cent and 1.5 per cent o the value o these unds. In other words,

und supermarkets or networks should be cheaper than investing

directly with individual und managers and can be more fexible and

eective in meeting investors changing needs.

WhEn lEss Is MoRE

Keeping paperwork under control can make lie easier or investors

and help you make the most o your money. Statements rom severaldierent und managers may not always present inormation in

ways that are directly comparable but unied statements rom und

supermarkets or networks will do so. This should help investors

consider which unit trusts or OEICs have beaten their benchmarks

or sector averages or capital growth, income or a mixture o both.

Some leading und supermarkets will even pay a small thank you to

investors to encourage them to consider re-registering their various

unit trusts, OEICs, ISAs and PEPs with the und supermarket. The

money can remain invested with the same und managers as beore

but all the administrative paperwork is brought together in one place

by the und supermarket or network.

Many o these platorms will also provide online tools to help investors

drill down into pooled unds asset allocation to see, or example,

how much o your individual portolio is invested in geographical

regions, such as Continental Europe, or sectors, such as Emerging


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Markets, or assets, such as commodities like oil or gold. Unlikeinormation supplied by competing und managers, when it can be

dicult to see the wood or the trees, data rom und supermarkets

should be easy to understand and compare.

uP-to-datE statIstICs FoR InFoRMEd dECIsIons

Instead o the time-consuming task o requesting and collating

inormation rom several dierent und managers, an ecient

und supermarket or platorm will provide comparable up-to-date

inormation online and by post. This should make it easier or investors

to keep in touch with todays ast-moving money markets and, where

necessary, change their asset allocation to refect events, trends and/

or changes in their individual circumstances. In other words, these

provide a modern and fexible way or investors to manage their

money eectively.


22


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23

Fund supermarkets or networks enable investors to avoid or

reduce the delays and costs that might otherwise be encountered

when switching investments between competing und managers.

As mentioned earlier, initial costs when dealing direct with many

unit trust and OEIC und managers oten exceed 5 per cent o the

sum being invested and these costs can, in some cases, be avoidedaltogether when switching money within the wide range oered by

leading und supermarkets or networks. Speeding up the process also

reduces the risks described in the previous chapter o being out o

the market when prices may rise unexpectedly. Nobody can tell or

certain when prices will rise most but there is no longer any need

to risk missing these best days when reallocating assets because o

administrative delays. Fund supermarkets or networks can speed up

the process o comparing returns, reallocate assets where necessary,

cut costs and help you make the most o your money.


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Unortunately, investors do not have a time

machine to return to the share and und

prices which were available ve years ago

when, in March, 2003, the FTSE 100 index

stood at its low-point this century o about

3,200. Nor will any investor ever be able toknow or certain when the best time to invest

will be because share prices and most unit trust or OEIC prices may

all or rise without warning. What we can see is that it was better to

have been continuously invested over the last 15 years than to have

missed the best days when share prices rose most and that there are

risks entailed in being out o markets as well as in them.

Comprehensive analysis o returns rom dierent types o asset orstores o wealth over the last century and more suggests that over

most periods o ve consecutive years or more, stock market-based

investments tended to provide greater returns than bank or building

society deposits. In other words, investors have oten been rewarded

or accepting some degree o risk. Unit trusts and OEICs provide

tried-and-tested methods o diminishing risks by diversication. They

also enable individual investors to share the cost o proessional und

management and gain exposure to geographical areas and/or types o

assets which it would be impractical or them to approach directly.

24

Conclusion

ChaPtER FIvE

scce i iei i meime cmpre

rwi pr. y w e re fe

er .


28/32

CONCLUSION

25

nEW oPPoRtunItIEs FoR savERs and InvEstoRs

More fexible rules or ISAs and pensions, including SIPPs, enable

savers to shelter more money tax-ree and have more fexibility about

when and how they drawdown this wealth to spend how they wish.

The maximum that can be placed in risk-ree deposit-based ISAs will

rise to 3,600 per annum per investor on April 6, 2008, when the

maximum that can be sheltered rom taxes in stock market-based

ISAs will rise to 7,200. Although these may seem modest sumsto serious savers and investors, they are annual allowances which

can build up over the years when taken up regularly. However, you

cannot go back to utilise earlier years unutilised allowances so it

really is a case o use them or lose them.

Pension rules which took eect in April, 2006, mean savers aged 50

or more can take up to 25 per cent o a wider range o pension unds

as tax-ree cash to spend on any purpose without needing to changejobs or retire or use the remainder o their pension unds to buy an

annuity or guaranteed income or lie. In addition to this increased

fexibility, everyone including members o company or occupational

pensions can now set up a SIPP and have more control over where

their retirement unds are invested. Everyone, including children and

non-taxpayers, can now have their pension savings boosted by the

basic rate o income tax so that a contribution o 80 will add 100

to the value o a pension und beore costs. Higher rate taxpayers can

achieve the same eect by paying in just 60.

loWER Costs WIth BEttER sERvICE

Whole-o-market nancial advisers can cut the cost o investment

by avoiding initial charges which oten exceed 5 per cent i you deal

direct with unit trust or OEIC und managers. These intermediaries are

remunerated by trail commission o 0.5 per cent per annum which undmanagers will not pay to investors who approach them directly. Why not

make sure that more o your money is working or your benet, rather than

being absorbed by und managers or old-ashioned intermediaries?


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CONCLUSION

26

Leading und supermarkets or networks give you access to morethan 900 dierent unds managed by more than 50 competing

und managers with the convenience o bringing all the paperwork

and administration together in one place. This makes it easy or

investors to obtain up-to-date inormation on all their investments in

a comparable ormat and to reallocate assets or switch unds quickly

and cheaply i they wish to do so.

tIME not tIMIng

The sooner you start to make the most o your money with a

disciplined approach to saving and investment the easier it will be

to achieve your nancial aims. The eects o compound interest over

long periods o time can be substantial. Take, or example, the City

tale o two mythical sisters; Prudence and Extravaganza. When they

are both 18 years old, Prudence starts investing 20 a week while

Extravaganza hardly notices the same sum disappear at the shops.Assuming or the purpose o simplicity that Prudence achieves a

return o 10 per cent per annum, her rst years investment o 1,000

will have rolled up into 6,700 ater 20 years. But that is only part o

the story because in each o the intervening 19 years she put aside

the same sum which would have grown into a total o 57,000 by the

time she reached the age o 38.

Even i Prudence stopped any urther savings at that point, compoundinterest o 10 per cent per annum in this example would cause her

investments to grow to more than 500,000 by the time she reaches

60 years o age. By contrast, i Extravaganza starts investing 20 a

week when she is 38 and receives the same compound return o 10

per cent per annum until she reaches 60 years o age and so has

invested or two more years than Prudence the total und value

achieved by Extravaganza will be only 79,000 or about a sixth o

that achieved by Prudence. The explanation is that Prudence had

time on her side and used it to achieve her nancial objectives.


30/32

27

What to do next

There are many options, products and routes to choose rom when thinking

o investing or your uture.

The Telegraph Investor Service can help you with all types o investments

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Our chosen partner providing this service is Skipton Financial Services

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