Different types of saving and investment

What is the purpose of saving and investment

• Saving and investment are open to you when you are earning or receiving more money than you need to cover your expenditure. Invest can increase future wealth

Different types of investments and savings

1) Individual savings accounts (ISA)

2) Deposit and savings account

3) Premium bonds

4) Bonds and gilts

5) shares

6) pensions

Individual saving accounts (ISA)

• This is a type of saving account where the holder is not charged income tax on the interest received

ISA advantages

• Tax is not charged on interest earned allowing the saver to keep all of the rewards for saving

• Interest rates are sometimes slightly higher than in alternative saving accounts

ISA disadvantages

• Notice is often required to make withdrawals and according to the agreement there may be a limit set on the number of withdrawals made

• If the saved makes more withdrawals than set out in the agreement then the penalty may cancel out the tax savings

• There is a limit set on the annual amount that can be placed in an ISA

Deposit and savings accounts

• These are accounts where interest is paid on the balance and normally the holder needs to give notice before withdrawing funds

Deposit and saving accounts advantages

• Interest is earned on positive balances

• Accounts sometimes require regular deposits of a set amount forcing the saver tof ollow a savings plan

Deposit and saving accounts disadvantages

• Interest earned is taxed

• The percentage rate of interest paid on savings is likely to be lower than interest to be paid on borrowing, therefore the benefits of savings are lost if the customer is borrowing at the same time

Premium bonds

• A government scheme that allows individuals to save up to set amount by buying bonds. The bond holder does not receive interest on their savings but each bond is placed into a regular draw for cash prizes

premium bonds advantages

• Chance of winning substantially more than could be earned in interest

• can be easily withdrawn with no loss or penalty

premium bonds disadvantages

• No guaranteed return on investment

• Maximum amount reviewed annually by the government

• The amount invested, assuming zero or low returns, loses value due to inflation

Bonds and gilts

• These are fixed term securities where the lender (the individual) lends money to companies and governments in return for interest payments. The money is invested for a specified period of time

Bonds and gilts advantages

• Regular fixed returns

• spreads risk across a range of markets

Bonds and gilts disadvantages

• Risk of losing some or all of the value of the investment if the bond or guilt value falls

• Interest payments may not be received if the issuer is unable to make payments

shares

• Shares involve investment in a business in return for equity, i.e; the shareholder becomes a part owner of the business. The shareholder will receive dividends from the company’s profits and will also want the value of the shares to increase

shareholder

• someone who has invested in a company in return for equity, i.e; a share of the business

shares advantages

• Shares prices fluctuate offering a potential high reward

• shareholders returns can include dividend payments and an increase in share value

• As part owners in a business there may be additional benefits including discounts and special offers

• For some investors share ownership is more than just a way of saving - it is a pastime and creates interest

expenditure

• the amount of money you need to cover all your expenses/outgoings, eg; your mortgage and bills

pensions

• These are long-term savings plans where individuals make regular contributions, called premium payments, throughout their working life. This is then repaid as either a lump sum, regular payments or a combination of the two upon retirement. Pensions can be state, company or private

pensions advantages

• Encourages individuals to save throughout their working life for retirement

• Depending upon the policy, an individuals savings may be boosted by an employers contributions increasing the final value of the saving

• Regular payments are deducted, sometimes at source, meaning the individual is tied into making the regular contributions

pensions disadvantages

• Movement between jobs may mean that one policy stops and another starts, thus reducing the overall cumulative value of the savings

• Final outcome is difficult to predict

• If compulsory payments are deducted this may affect short-term living standards