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 simply denotes the annual rate of interest that the account pays. However, because interest can be ...

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The personal savings allowance (PSA) 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 a PSA of £500 and pay income tax at a rate of 40% on any interest in excess of their PSA. Those paying income tax at the additional rate have no PSA and pay income tax at 45% on 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 taxable income (after allowing for the personal allowance) from other sources is no more than £5,000.

Where an individual has received interest payments and is completing a tax return, 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 paid.

Current accounts often provide cheque books (on request) 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 or in circumstances if the account holder is terminally ill will lose the Government bonus plus any interest on this and will have a 5% charge imposed.

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Fixed interest savings certificates

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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 insti...

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An accurate calculation of yield is to look at the effect of any capital gain or loss at redemption (taking account of the difference between the price the bond is trading at and its par value) and include this within the overall return.

The redemption yield is the figure that can be used to compare a bond with the return from another type of investment, but the redemption yield calculation is complex and not required for this level of study.

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Investors will therefore make capital gains or losses which, on the majority of these investments, is tax free.

The Government is the most secure bond provider, having never previously defaulted on a loan and therefore yields will be less as a result of this security.

Commercial organisations are given credit...

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

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When calculating the redemption yield for index-linked gilts, one would have to assume a level of RPI between now and redemption in order to accommodate the increased cash flows received prior to redemption.

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

Creditworthiness of institutions is constantly updated. Overall, credit ratings fall into two categories: investment grade bonds and non-investment grade bonds. Investment grade bonds have ratings of BBB or higher from Standard and Poor’s, or Baa3 from Moody’s, and are considered to have a relat...

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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 fo...

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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 thrive, ...

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Any appreciation in capital value on disposal will result in a potential capital gains tax liability. However, you should note that the individual can reduce the size of any taxable gain by use of the annual exempt amount, whereby gains up to a certain amount each year are free of capital gains tax, and, possibly, 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 w...

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The dividend is paid as interest

Any gains made on the disposal of preference shares are subject to CGT

Rewards are lower than from ordinary shares, being more aligned with returns from fixed interest securities

The London Stock Exchange (LSE) is one of the oldest and largest exchanges in the world. 

A company wanting to have its sh...

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Companies listed on the AIM tend to be smaller, newer companies who are unable to satisfy the requirements for a full stock market listing.

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Market capitalisation is a measurement of the company's size and is found by simply multiplying the number of shares issued by the current share price.

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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 ev...

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If an individual lets part of their principle private residence, then subject to certain conditions, up to £7,500 of rental income 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 period...

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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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