Types of Investment Account
There are a variety of investment possibilites, each with different terms, conditions, considerations and risk. The main types of investment account are Stakeholder Pension Schemes, Investment Funds, Child Trust Funds, Hedge Funds, ISAs, and Property Investment. You may wish to combine one or more of these possibilites to create a balanced portfolio, or consider that some are more appropriate for your age, personal or financial situation than others.
Child Trust Fund
Child Trust Funds, or CTFs, are tax-free savings accounts, specifically designed for children. They were introduced on the 6 April 2005, and aim to help parents prepare their children financially for the transition into adulthood. Parents and friends can make contributions to the account, and any child born after 1 September 2002 qualifies to receive contributions from the government. Currently the government makes two contributions of two hundred and fifty pounds to the CTF, paid when the account is opened and around the child's seventh birthday. Low-income families may qualify for two contributions of five hundred pounds instead. When the child in question reaches eighteen, they can choose to withdraw the money in the fund or re-invest it. Noone but the child to whom the trust fund belongs is able to access the money. As with most savings accounts, there are different types of Child Trust Fund. Both the Share CTF and Stakeholder CTF contain investment elements. The Share CTF links the fund and its returns to the performance of the stock market. The Stakeholder CTF operates in the same way, but the investments chosen are carefully regulated according to government guidelines and an independent financial advisor monitors the fund to ensure that as the child ages the risk to the capital is reduced. For more details see Child Trust Funds.
Independent Savings Account / ISA
1999 saw the introduction of a new type of savings account: the Individual Savings Account, or ISA. It allows savers to save a limited amount tax-free per annum; currently (tax year 2008/2009) this limit is £7,200. There are two different types of mini ISA in which savers can choose to invest: a mini cash ISA and a mini stocks and shares ISA. You can invest £3,600 in one or both mini ISAs or simply £7,200 in a regular ISA, which will invest part of your money in cash and part in stocks and shares. ISAs are required to adhere to the Individual Savings Account Regulations of 1998 to ensure that no unneccessary risk is taken with the investors' capital. The performance of the stock market will determine the final value of your invested capital: if the market increases steadily, your original capital will increase at the same rate. For more details see ISAs.
Stakeholder Pension Schemes
A stakeholder pension is a type of personal pension scheme, introduced by the government in an attempt to encourage people to save for their retirement. They are reasonably simple to understand, flexible and carefully monitored to ensure they provide a secure investment. Any UK resident can join a stakeholder pension scheme and both the pension holder and their friends and relatives can contribute to the savings fund. Stakeholder pensions are money purchase pensions. This means that you contribute money to the scheme which builds up into a fund; the money is invested and any investment returns are added to your fund. Your pension scheme provider will also claim tax relief on the contributions you make. Upon reaching retirement you will be entitled to a tax-free lump sum, usually equal to approximately 25% of the total value of the fund. The rest of your pension fund will be used to buy an annual pension for you from an insurance company. For more details see Stakeholder Pensions.
Hedge Funds
Set up in 1940s America, hedge funds aim to invest large sums of money into a wide variety of assets. Usually, hedge funds are appropriate investment options for the very wealthy, and as such are rarely offered to regular savers by banking institutions. Many financial institutions will not offer hedge funds, because they are in low demand and involve a considerable amount of work. Militant management of each investment within the hedge fund makes it possible for capital to be invested at high risk but still make great profits. When managed with care, hedge funds tend to outperform traditional investment accounts. However, even with trained, experienced investment managers these funds are very high risk. The idea is to buy stocks low and sell them high, similarly assets such as property are bought when market trends predict that they will rise in value creating good profit margins. However, most hedge funds will also invest capital in less risky schemes to avoid losing huge amounts of money invested by important banking clients. Hedge fund managers tend to charge very large fees because they are committed to a huge amount of work for the fund clients, and so these accounts only provide a viable option for investors with a large amount of capital that they are prepared to lose.
