UK Financial Services, regulations and ethics

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The most effective correlation is a negative correlation as the losses in one area are balanced by the gains in another.

Cash deposits are not investments as such but deposits of funds into recognised institutions such as banks and building societies who in turn, use those funds to lend money to other institutions and individuals at a higher rate of interest than they pay the depositor.

Providing the investment is into a recognised financial institution such as a UK bank or building society or via National Savings and Investments, any capital invested via deposit accounts is exposed to minimal risk but, equally, there is no potential for capital growth. Therefore, the real value of the original capital can be eroded by the effects of inflation over time.

Returns will be in the form of interest on the capital invested at the rate offered by the account. Both the nominal annual rate and the Annual Equivalent Rate (AER) are usually quoted. The nominal rate will just be expressing the annual rate of interest that the account pays. However, because interest can be p...

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The Personal Savings Allowance gives basic rate taxpayers £1,000 of tax-free interest this tax year. Interest in excess of this allowance is liable for income tax at 20%. Higher rate taxpayers have £500 of tax-free interest each tax year and pay 40% on any excess. Those paying income tax at the additional rate have no allowance and pay income tax at 45% on the full amount of gross interest received.

In addition to the personal savings allowance there is also a £5,000 0% starting rate of income tax for savings income but it only applies if income from other sources is no more than £5,000.

Where an individual has to complete a tax return and has received interest payments, they must show the gross and net amounts received.

Each year the Bank or Building Society will provide the account holder with a certificate showing the gross amount of interest produced.

Current accounts provide cheque books and allow the user to set up direct debits and standing orders and withdraw money from ATMs. If any interest is paid on these accounts it is normally at a very low rate.

Savings accounts generally come in two forms, namely instant access or restricted access.

An instant access account can only be so named where the individual account holder is able to withdraw funds immediately. Rates for these accounts will ...

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For those using the Lifetime ISA for retirement savings, the funds and bonus can be withdrawn tax free after age 60. Funds withdrawn before age 60 for any purpose other than a first home purchase will lose the Government bonus plus any interest on this and will have a 5% charge imposed

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At the time of writing the following are available:

Premium bonds

Green savings bonds

Direct saver accounts

Investment accounts

Income Bonds

Direct ISAs and Junior ISAs

Guaranteed growth bonds ...

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Guaranteed Growth Bonds

The Guaranteed Growth Bond has a fixed term of one or three years with differing fixed rates for each. Interest is paid gross but is taxable so will count towards the PSA.

Both of the above products can only be applied for online and are available to those who have maturing existing investments.

To keep up to date with the latest product offerings visit: www.nsandi.com/our-products .

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They have several common features. In the main, these securities are tradable in that once an investor buys a bond (by doing so he lends money to the borrowing institution), he can then go on to sell it to a third party prior to redemption. This can be done several times before the term of the security ends.

In general, fixed interest securities will carry a fixed coupon or rate of interest. Typically, interest will be paid every six months. Some stocks, e.g. index-linked gilts, offer a coupon and capital value at redemption that increases with the RPI.

To assess the interest (running/income) yield received from a bond for the price paid, we carry out th...

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Net interest yield + (gross redemption yield – gross interest yield)

Using our example above, we can analyse the effect of taxation on the overall yield:

The gross interest yield (running yield) is 4.5%. Gross redemption yield is 2.35%.

Starting rate taxpayer (10%)

Basic rate taxpayer (20%)

Higher rate taxpayer (40%)

Gross interest yield

4.50

4.50

4.50

Less tax

0.45

0.90

1.80

Net interest yield

4.05

3.60

2.70

Loss/Gain to redemption

-2.15

-2.15

-2.15

Net redemption yield          

1.90

1.45

0.55

Low coupon stocks will provide less taxable income and smaller gains and losses on redemption than a high coupon stock. They could, therefore, be attractive to higher rate taxpayers. Higher coupon stocks will be more attractive to starting rate or non- taxpayers.

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In the case of fixed interest securities, we would need to consider factors that could affect an institution’s ability to repay capital and/or income. The risks of this happening can be categorised under the headings of non-systematic risk (the risk arising from factors affecting the individual institution) and systematic risk (the risk arising from factors affecting the market as a whole).

Under non-systema...

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The holder of a shorter dated bond will get a return on the bond earlier than a holder of a longer dated stock and will be exposed to interest rate movements over a shorter period of time.

Therefore, the stocks that tend to be most volatile in price movements are longer dated stocks with lower coupons.

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Inc...

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Gilts are categorised in relation to their redemption periods. “Shorts” have less than seven years to redemption. There are favoured as surplus deposits by larger financial institutions a...

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This is effectively a loan taken out buy the original seller using the gilt as security. If the original owner does not buy back their stock on the set date at the agreed price, the gilt will become the property of the new owner and he will be within his rights to sell it on the open market.

The markets are less liquid, i.e. fewer buyers and sellers.

Creditworthiness of institutions is forever being updated.

Yields are generally higher than gilts to compensate for the extra risks.

Categories of Corporate Bonds

Debentures

Usually implies that the debt is covered by some form of security and conditions may be imposed on the borrower to maintain the importance of the debt in relation to others. It will often stipulate the debenture holder’s priority over other company creditors.

Some debentures will be “secured” against assets within the company. These could be fixed, i.e. specific assets, or there could be a floating charge over any of the comp...

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Eurobond market is free from governmental control so many innovative products devised, e.g. bonds paying interest in dual currencies, bonds issued with warrants, etc

Interest is paid gross without deduction of tax

Bulldog bonds

These are loans raised in Sterling by overseas governments on the London Stock Exchange.

Risks

Although bonds are relatively simple products there are still risks involved. The risks are interest rate risk, liquidity risk, inflation risk and default risk. When interest rates rise, bond prices fall and vice versa. Many bonds trade infrequently so it may be difficult to sell at a particular time. Returns on conventional bonds are eroded by the effects of inflation although index-linked bonds give an element of protection against this and all bonds carry the risk that the issuer will not be able to meet the ongoing interest payments or the return of capital at maturity.

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All share classes will provide the ability to receive a dividend in some ...

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History indicates that people wanting to achieve long-term real returns of income and capital but who are willing to accept the volatility surrounding returns should consider investing in equities.

The expectations of the markets as a whole and investor sentiment in terms of supply and demand will have a great deal of impact on the values of equities.

The connection between the attitudes of the markets on various company shares derives from factors such as the political and economic environment, and expectations of a company’s profit-making capability. Past performance of the organisation can act as a strong guide but will not definitely predict the future.

A large part of the company’s ability to thri...

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Any appreciation in capital value on disposal will result in a capital gain potentially subject to capital gains tax. However, you should note that the individual can still offset these gains by use of the annual exemption allowance, where gains up to a certain amount each year are free of capital gains tax, and other allowances that may be available depending upon the circumstances of share ownership.

Ordinary shares are the most common forms of tradable equities

They give shareholders the right to all profits that exist after tax and preference shareholders’ dividends have been paid

Not all profits will generally be paid out by companies. They will retain some as reserves which will therefore increase the overall asset value of the company

Ordinary shareholders do have voting rights and are entitled to vote at general meetings and elect directors involved ...

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Redeemable preference shares which can be redeemable at a predetermined date or at the option of the company

Convertible preference shares which carry the right to convert into ordinary shares at pre-determined dates and terms

The price on the latter types of share tend to behave both in line with bonds and ordinary shares, depending upon whether or not conversion rights look likely to be taken up

The London Stock Exchange (LSE) is one of the oldest and largest exchanges in the world. It was formed in 1773 by stockbrokers who used to gather in a nearby coffee house.

A company wanting to have its shares listed needs to meet certain criteria:

Have a three-year track record

Make a full disclosure of its financial affairs

Offer at least 25% of the total shares of the company for public subscription

This means that it is typically only large companies who can meet the requirements.

For smaller companies unable to meet the requirements to have a full listing, there is the Alternative Investment Market (AIM). These shares are much higher risk than those listed on the main market since the shares are likely to be more illiquid (fewer buyers and sellers) due to the size of the companies and there is a greater chance of the company getting into financial diffi...

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New York Stock Exchange

The NYSE is the largest stock exchange in the world. It is an order driven market with brokers dealing with one another to match trades on behalf of investors.

Dealing either takes place on the floor of the exchange or via a computer system known as SuperDot. Shares can be held by investors personally, nominees or in a central depository called the Depository Trust Corporation (DTC).

NASDAQ

NASDAQ is a US screen based, quote driven market operating in a similar way to SEAQ in the UK. Companies listed on NASDAQ tend to be newer, higher growth and more volatile stocks. The exchange is well known for the holding of technology stocks.

It is a quote driven market with trades still carried out through market makers, albeit predominantly via an electronic exchange.

The largest market for unlisted securities is the Alternative Investment Market (AIM). The AIM is the most liquid market for unlisted securities. It is designed for companies that are “smal...

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This will depend upon the economic conditions over a period and the quality of tenants. Property analysts will tend to foresee where conditions are improving or getting worse and buyers and sellers keeping a close eye on trends can have little time in which to make decisions. However, prices can start to spiral either way and those not taking all factors into account can suddenly suffer nasty shocks.

As an example, if the property is in an area already charging high rents on average, then the landlord letting out to a student will be charging out even higher sums to compensate for the possible risks involved. Yields will be high, but what if the stude...

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If an individual lets part of their principle private residence, then subject to certain conditions, up to £7,500 per year can be received tax free and the residence will continue to enjoy its tax-exempt status for CGT purposes.

Note, that purchasers of land and property in the UK will be subject to Stamp Duty Land Tax, the rate of which as a percentage of the total value of the consideration increases the higher the value. There is also additional stamp duty to pay on the purchase of second homes/buy-to-let properties.

Buy-to-let

We have already discussed some key issues but it is worth reiterating that an individual wishing to buy this type of property needs to consider liquidity, management of the property, potential tenants and void periods befo...

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Offshore property companies

Real Estate Investment Trusts

Risks

Property investment is not risk free, but prices tend to be less volatile than equities. Property is an illiquid investment and has costs associated with it - buying and selling costs and stamp duty - which can make it expensive. There can be periods of time with no rental income if tenants are not available and sales can take a significant period of time to achieve.

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