Saving & Investing

What it is....

It is never too early to start saving. Whether this is into a bank or building society account, premium bonds or some other type of savings account.
Investing may be something that comes into your planning sometime later. However it is possible that some investments have already been made on your behalf by parents or grandparents. Either way it is well worthwhile having a little knowledge on what savings and investment products are out there with young people in mind. The list below does not include ALL savings and investment vehicles, just those that may be most useful for young people.
Before starting, it is worth making the distinction between saving and investing. In a nutshell, saving takes care of short-term needs whilst investing looks after long-term goals. As a potential saver you should also be aware of two important things.

  • Not all savings and investments keep up with inflation.
  • Many products deduct income tax from your interest before paying you.

Saving

  • You can be any age to start a savings account.
  • You only need a small amount to open a savings account – as little as £1
  • Your savings are safe – there is no risk to the capital (the amount you started with).
  • You earn interest – generally a low rate though.
  • Your money is easily accessible – you can withdraw it at short notice without penalty.
  • In times of high inflation (like now!), the value of your savings may end up lower than when you started, even after interest is added on.
  • Some savings products have income tax deducted from your interest before it is paid to you. You can claim this back if you earn less than the basic taxable wage in a year.

Savings Products

  • Bank and Building Society Accounts
    • No capital risk on your savings
    • No minimum age to open an account
    • You can choose between instant access – you’ll get a low interest rate, or
    • Fixed term where you won’t be able to get your money out for the period of the deal but you will get a higher interest rate paid.
    • Wide range of accounts to choose from.
    • Low minimum start amount.
    • No regular deposits required.
    • Tax is paid on interest but it is reclaimable if you are earning less than your personal tax allowance.
    • Interest rates paid are currently lower than inflation.
  • Cash ISA (Individual Savings Account)
    • Small starting balance – only £1
    • Lots of accounts to choose from.
    • Interest is paid tax-free.
    • The scheme is government backed so your money is safe.
    • The minimum age to open a cash ISA account is 16.
    • You can have a variable or fixed rate interest rate.
    • There is maximum amount you can invest each year – from 2018  it is £20,000
    • You can withdraw your money but there maybe a penalty if you are on a fixed rate deal.
    • You can re-invest but it will count a new savings.
    • Interest rates paid are currently lower than inflation.
  • Premium Bonds
    • Minimum amount is £100
    • The scheme is government backed so your money is safe.
    • The minimum age to buy premium bonds is 16.
    • No interest is paid.
    • Your bonds are entered into a monthly draw where you have a chance to win £1,000,000 – there are lots of smaller prizes too, down to £25.
    • Any winnings are tax-free.
    • You may win nothing!
    • You can sell your bonds and get you money back but it takes about 2 weeks.
    • http://www.nsandi.com/savings-premium-bonds
  • National Savings and Investments – Index linked savings certificates
    • Minimum amount is £100, the maximum is £15,000
    • The scheme is government backed so your money is safe.
    • The minimum age to buy savings certificates is 16.
    • They pay the RPI (The official measure of inflation) plus a fixed interest rate – so they are inflation proof.
    • Each issue is in a 3 year or 5 year term.
    • You can take your money out after 1 year with no penalty and no loss of interest.
    • https://www.nsandi.com/our-products

Investing

  • There is potential for your money to grow much more than in an interest bearing account.
  • Investments are for the long term.
  • Your money may not be accessible for a long time.
  • Returns are not guaranteed. You could lose some or all of your capital.

Investment Products

  • Shares
    • When you buy a share you are buying a stake in the company.
    • If the company performs well then the share value is likely to increase. If it performs badly there share price is likely to go down.
    • You may receive a portion of the company profits through a dividend, which is normally paid once a year in cash or free shares.
    • Even if the company makes a profit you are not guaranteed a dividend.
    • You could lose your entire investment if the company goes out of business e.g. Northern Rock
    • You could do REALLY well! E.g Apple computers.
    • You buy shares through a stockbroker either over the phone or online. Many banks are also stockbrokers.
    • Stockbrokers charge a commission – on a small amount of shares this will be a flat fee. If you are only investing a small amount the fee maybe more than the share value!
    • You can sell your shares and take your money out of the company at any time. The money can take up to 14 days to go back into your account.
    • From time to time companies will raise more cash with a rights issue. This means that you will have the chance to buy shares at a cheaper price than the current market. Caution though – share prices often fall as soon as a rights issue goes through so it may not be ‘easy money’.
  • Stocks and Shares ISA
    • Minimum age is 18 to buy a shares ISA
    • You can start a share ISA with as little as £50 per month.
    • This works in a similar way to a cash ISA except your account has shares in it.
    • Your allowance of £20,000 per year can be split between cash ISA or a stocks and shares ISA.
    • You can choose which shares go into your ISA or…
    • You can choose a share fund – most ISA suppliers have them.
    • Any earnings on your share ISA are tax-free.
    • You may have to make regular payments.
    • It can be expensive to take money out.
    • The value of your ISA can go down as well as up.
  • Unit Trusts
    • You have to be 18 to buy into a unit trust.
    • The minimum amount is quite large £100 per month
    • Is a pool of shares (the trust) run by a fund manager.
    • You buy units in the fund.
    • This means that you spread your risk across lots of different shares.
    • The value of the units goes up and down in line with the underlying shares.
    • The value of the units can go down as well as up.
  • Investment Trusts
    • These are like unit trusts except that the investment trust, which is a company, runs the fund and you buy shares in the Investment trust.
  • Bonds
    • Are loans to a company, local authority (such as your local council) or government.
    • The bond will pay you a fixed interest rate, which depends on how risky the borrower is.
    • The bond also has a value, which can go up or down.
    • Bonds tend to be very long in duration because these borrowers want to borrow the money for a long period.
    • You can sell your bond before it expires (or matures) and get the market value of the bond back.
    • The amount you get back will depend on the amount of interest that has accrued and also the market value of the bond.
  • Corporate Bonds
    • Issued by companies as a way of raising money.
    • They pay a fixed interest rate – often much higher than you get paid on a deposit account. The exact rate depends on the rating of the borrower.
    • Tax is paid on the interest.
  • Gilts
    • Are bonds issued by the British Government.
    • There are very long term.
    • There are many different issues paying different interest rates or coupon.
    • They pay interest twice each year.
    • Tax is paid on the interest.
  • Funds
    • The fund invests in lots of different bonds.
    • You buy units in the fund – similar to a unit trust.

Information and Advice

  • Anyone giving advice on, or selling, investments must be authorised by the Financial Services Authority (FSA).
  • If you buy through these advisors and they miss-sell you a product (one that wasn’t right for you) you will be in a much stronger position to get your money back.
  • Banks, Building Societies and National savings and Investments give you information on their products but it is YOUR choice to buy or not.

Wize Tips

  • You are never too young to start saving.
  • Saving is for the short-term.
  • Investing is for the long-term.
  • Inflation may reduce the value of your savings faster than the interest you receive grows it.
  • Many accounts take tax away from your interest before you receive it.
  • If you take advice on your investments, make sure it is from an FSA regulated advisor.