Protecting your wealth

Posted on July 1, 2013 by - Uncategorized

Passing on assets without having to pay Inheritance Tax

A good estate planning and protection strategy can provide you and your family peace of mind that provisions are set in place for the disposal of your estate upon your death, securing your assets for the benefit of your heirs. Many people are surprised at how large their estate would be if they take into account the value of their home, life insurance policies not written in an appropriate trust and in some cases death in service benefits.

Inheritance Tax is the tax that is paid on your estate, chargeable at a current rate of 40 per cent. Broadly speaking, this is a tax on everything you own at the time of your death, less what you owe. It’s also sometimes payable on assets you may have given away during your lifetime. Assets include property, possessions, money and investments. One thing is certain: careful planning is required to protect your wealth from a potential Inheritance Tax liability.

Not everyone pays Inheritance Tax on their death. It only applies if the taxable value of your estate (including your share of any jointly owned assets and assets held in some types of trusts) when you die is above the current £325,000 (frozen until April 2014) threshold or nil rate band. It is only payable on the excess above this amount.

Inheritance Tax exemptions and reliefs
Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Examples include:

Spouse or registered civil partner exemption: Your estate usually doesn’t owe Inheritance Tax on anything you leave to a spouse or registered civil partner who has their permanent home in the UK – nor on gifts you make to them in your lifetime – even if the amount is over the threshold.

Charity exemption: Any gifts you make to a qualifying charity – during your lifetime or in your will – will be exempt from Inheritance Tax.

Potentially exempt transfers: If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.

Annual exemption: You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount – you can also use your unused allowance from the previous year but you use the current year’s allowance first.

Small gift exemption: You can make small gifts of up to £250 to as many individuals as you like tax-free.

Wedding and registered civil partnership gifts: Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.

Business, Woodland, Heritage and Farm Relief: If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.

Transfers of assets into most trusts and companies will become subject to an immediate Inheritance Tax charge if they exceed the Inheritance Tax threshold (taking into account the previous seven years’ chargeable gifts and transfers).

In addition, transfers of money or property into most trusts are also subject to an immediate Inheritance Tax charge on values that exceed the Inheritance Tax threshold. Tax is also payable ten-yearly on the value of trust assets above the threshold; however, certain trusts are exempt from these rules.

Gifts and transfers made in the previous seven years
In order to work out whether the current Inheritance Tax threshold of £325,000 has been exceeded on a transfer, you need to take into account all chargeable (non-exempt, including potentially exempt) gifts and transfers made in the previous seven years. If a transfer takes you over the nil rate band, Inheritance Tax is payable at 20 per cent on the excess.

‘Nothing is certain but death and taxes’ – and they are intrinsically linked

Posted on April 30, 2013 by - Uncategorized

Will your legacy involve just leaving a large Inheritance Tax bill for your loved ones?

In order to protect your family and business, it is essential to have provisions in place after you’re gone. The easiest way to prevent unnecessary tax payments such as Inheritance Tax is to organise your tax affairs by obtaining professional advice and having a valid will in place to ensure that your legacy does not involve just leaving a large Inheritance Tax bill for your loved ones.

Saving your beneficiaries thousands of pounds
Effective Inheritance Tax planning could save your beneficiaries thousands of pounds, maybe even hundreds of thousands depending on the size of your estate. At its simplest, Inheritance Tax is the tax payable on your estate when you die if the value of your estate exceeds a certain amount. It’s also sometimes payable on assets you may have given away during your lifetime, including property, possessions, money and investments.

Inheritance Tax is currently paid on amounts above £325,000 (£650,000 for married couples and registered civil partnerships) for the current 2013/14 tax year, at a rate of 40 per cent. If the value of your estate, including your home and certain gifts made in the previous seven years, exceeds the Inheritance Tax threshold, tax will be due on the balance at 40 per cent.

Leaving a substantial tax liability
Without proper planning, many people could end up leaving a substantial tax liability on their death, considerably reducing the value of the estate passing to their chosen beneficiaries.

Your estate includes everything owned in your name, the share of anything owned jointly, gifts from which you keep back some benefit (such as a home given to a son or daughter but in which you still live) and assets held in some trusts from which you have the right to receive an income.

Against this total value is set everything that you owed, such as any outstanding mortgages or loans, unpaid bills and costs incurred during your lifetime for which bills have not been received, as well as funeral expenses.

Any amount of money given away outright to an individual is not counted for tax if the person making the gift survives for seven years. These gifts are called ‘potentially exempt transfers’ and are useful for tax planning.

Potentially exempt transfers
Money put into a ‘bare’ trust (a trust where the beneficiary is entitled to the trust fund at age 18) counts as a potentially exempt transfer, so it is possible to put money into a trust to prevent grandchildren, for example, from having access to it until they are 18.

However, gifts to most other types of trust will be treated as chargeable lifetime transfers. Chargeable lifetime transfers up to the threshold are not subject to tax but amounts over this are taxed at 20 per cent, with up to a further 20 per cent payable if the person making the gift dies within seven years.

Some cash gifts are exempt from tax regardless of the seven-year rule. Regular gifts from after-tax income, such as a monthly payment to a family member, are also exempt as long as you still have sufficient income to maintain your standard of living.

Combined tax threshold
Any gifts between husbands and wives, or registered civil partners, are exempt from Inheritance Tax whether they were made while both partners were still alive or left to the survivor on the death of the first. Tax will be due eventually when the surviving spouse or civil partner dies if the value of their estate is more than the combined tax threshold, currently £650,000.

If gifts are made that affect the liability to Inheritance Tax and the giver dies less than seven years later, a special relief known as ‘taper relief’ may be available. The relief reduces the amount of tax payable on a gift.

Leaving a tax liability
Inheritance Tax can be a complicated area with a variety of solutions available and, without proper tax planning, many people could end up leaving a tax liability on their death, considerably reducing the value of the estate passing to chosen beneficiaries. So without Inheritance Tax planning, your family could be faced with a large tax liability when you die. To ensure that your family and business benefits rather than the government, it pays to plan ahead. As with most financial planning, early consideration is essential.

Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.

Which investments are right for you?

Posted on April 30, 2013 by - Uncategorized

Assessing how best to achieve your goals

Building an investment portfolio can be a daunting challenge. However, if you are seeking to save over the long-term, perhaps for retirement or school fees, it may be worth taking the time to assess how best to achieve your goals.

Income or capital growth or a mixture of both
You need to consider which investments are right for you. It is easy to be tempted by the potential for short-term profits, particularly with interest rates so low, but you must also consider your ability to cope with losses, as any investment comes with risks. Knowing what you are prepared to lose helps establish your overall risk profile. Other considerations might include your level of financial understanding and whether you require an income or capital growth or a mixture of both.

Constructing your portfolio carefully
Once you have established these objectives, it is important to construct your portfolio carefully and continue to review it on a regular basis. What one person might consider cautious, another might consider risky, so it is important to understand your needs and seek professional financial advice.

Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.

Boosting retirement saving among UK workers

Posted on April 30, 2013 by - Uncategorized

Millions of people are not saving enough to have the income they are likely to want in old age

Up to 11 million workers will now start to be automatically enrolled into a workplace pension which commenced from October last year. Larger employers were the first, with small and medium-sized employers following over the next six years.

A workplace pension is a way of saving for retirement arranged by an individual’s employer. It is sometimes called a ‘company pension’, an ‘occupational pension’ or a ‘works pension’.

The fact is that millions of people are not saving enough to have the income they are likely to want in retirement. Life expectancy in the UK is increasing and at the same time people are saving less into pensions.

In 1901, for every pensioner in the UK there were 10 people working. In 2010, for every pensioner there were 3 people working. By 2050, it is expected that this will change to just 2 workers.

Automatically enrolling workers
Auto-enrolment is the Government’s key strategy to boost retirement saving among UK workers, at a time when employers have been closing company schemes, particularly the most generous final-salary pensions.

Employers will automatically enrol workers into a workplace pension who:

  • are not already in a qualifying pension scheme
  • are aged 22 or over
  • are under State Pension age
  • earn more than £9,440 a year (this figure is reviewed every year), and work or usually work in the UK

Required by law
For the first time employers are required by law to automatically enrol all eligible workers into a workplace pension and make a contribution to it. The Pensions Regulator is responsible for ensuring employers comply with the new law and have produced guidance to help employers to do this. They will write to each employer before the date they are required to start enrolling workers into a workplace pension, and depending on employer size, on at least one other occasion.

One of the employer duties relating to automatic enrolment is that employers are required by law to provide the right information in writing, to the right individual at the right time, so that people know how automatic enrolment will affect them.

Dates for your diary
The date on which workers are enrolled, called a staging date, depends on the size of the company they work for and is being rolled out over the next six years.

Large employers (with 250 or more workers) started automatically enrolling their workers from October 2012 to February 2014

Medium employers (50 – 249 workers) will have to start automatically enrolling their workers from April 2014 to April 2015

Small employers (49 workers or fewer) will have to start automatically enrolling their workers from June 2015 to April 2017

New employers (established after April 2012) will have to start automatically enrolling their workers from May 2017 to February 2018

Once The Pensions Regulator has notified employers of their date to enrol eligible workers into a workplace pension, employers can choose to postpone automatic enrolment for up to three months from that date. If they choose to postpone, employers must inform those workers in writing, including notice of their right to opt-in before the end of the postponement period.

Employers can also use the ‘postponement period’ for any newly eligible workers.

National Employment Savings Trust (NEST)
NEST is a trust-based, defined contribution pension scheme. It was specifically established to support automatic enrolment and make sure all UK employers have access to a suitable pension scheme for their employer duties. The scheme is not-for-profit and the Trustee has a legal duty to act in its members’ best interests. It is designed to be straightforward and easy for employers to use.

NEST offers a low-cost way for people to put money away for their retirement. NEST members have one retirement pot for life that they can keep paying into if they stop working for a period or become self-employed.

Tax-free lump sum
Most people will be automatically enrolled into a Defined Contribution scheme or money purchase scheme. This means that all the contributions paid into your pension are invested until you retire.

The amount of money you have when you retire depends on how much has been paid in and how well investments have performed. In most schemes when you retire you can take some of your pension as a tax-free lump sum and use the rest to provide a regular income.
The Government has set a minimum amount of money that has to be put into a Defined Contribution scheme by employers and workers.

Contribution levels
The minimum contribution level is just that, a minimum. Employers will be able to contribute more than the minimum if they wish, and many already do. Individuals can also contribute more than the minimum if they want to. These amounts can be phased in to help both the employers and employees manage costs.

Some people may be automatically enrolled into a Defined Benefit or Hybrid pension scheme. This type of scheme may also be known as a ‘final salary’ or ‘career average’ scheme. If you are enrolled into one of these schemes, the amount you get when you retire is based on a number of things, which may include the number of years you’ve been a member of the pension scheme and your earnings. In most schemes you can take some of your pension as a tax-free lump sum and the rest as a regular income.

Alternative arrangements can apply for Defined Benefit and Hybrid pension schemes to help them manage the introduction of auto enrolment. For example, the full provisions can be postponed until 30 September 2017 for existing scheme members. New staff will have to be enrolled from the employer’s staging date.

If employers or individuals do not know what type of scheme they are using for automatic enrolment, their employer will be able to tell them.

Challenges of this new legislation
Not surprisingly, with new legislation comes new jargon and employers will need to become familiar with terms such as ‘eligible jobholders’ and ‘qualifying pension schemes’ when considering their duties.

We can help you through the challenges of this new legislation and provide a full analysis of your options, so that you can identify and implement an agreed plan that best suits your requirements.

Greater clarity on how much care in ‘old age’ may cost

Posted on April 30, 2013 by - Uncategorized

Cap provides long-term savers with a greater idea of future spending

In his Budget speech delivered in March, the Chancellor, Mr Osborne, said this was a Budget for ‘an aspiration nation’. He explained this meant ‘helping those who want to keep their home instead of having to sell it to pay for the costs of social care.’ The confirmation of a £72,000 cap on social care costs provides long-term savers with a greater idea of future spending, but doesn’t cover additional costs incurred in a residential care home.

Cost of care
Savers who were hoping that the Budget 2013 announcement around social care would provide greater clarity on how much their ‘old age’ may cost them could be disappointed to find out that they will still have to foot the bill for uncapped ‘hotel costs’ incurred in a care home, such as food and board.

Means testing limit
Despite an increase in the means testing limit covering total care costs (social care and ‘hotel costs’) to £118,000, many whose estate is worth more than the limit will have to pay for the bill themselves. This means the majority of home owners will still find themselves in the uncertain position of not knowing how much their old age will cost.

High care home fees
People may be surprised that the social care cap does not cover their total care bill. This will result in many pensioners and elderly people having to prepare for high care home fees. Some may even find themselves in the unfortunate position of having to sell their assets to fund their old age. It is important for those who find themselves near or over the means testing threshold to prepare for the financial burden that may be placed upon them to avoid undesired consequences.

Will you be left to pick up the pieces?
The future of social care is one of the most important issues facing the country. All too often the NHS and families are left to pick up the pieces when older people fail in their struggle to cope alone. If you are concerned about how this could impact on you or a family member, please contact us to review your requirements.

Flexible drawdown rules untouched by Budget 2013

Posted on April 30, 2013 by - Uncategorized

Greater opportunities for those with over £20,000 pension income

The eligibility rules for flexible income drawdown from pensions were untouched by Budget 2013, which is welcome news if this is something you are considering or would like to find out more about. Flexible income drawdown is a type of income withdrawal where you can take pension income direct from your pension fund without having to purchase an annuity. Ordinarily, there are limits on the maximum income you can take under income withdrawal (known as ‘capped drawdown’).

Provided you have a secured pension income of over £20,000 ‘Minimum Income Requirement’ a year (which can include any State pension), you could be eligible to use flexible income drawdown in respect of your money purchase pension savings.

Amount of income
Under flexible income drawdown there is no limit on the amount of income you can take in any year. You can tailor your drawdown pension to suit your personal requirements, whether taking regular amounts at a set frequency or ad hoc income when required. There is even the option to draw the entire fund in one go. All income withdrawal payments are subject to income tax under PAYE at your appropriate marginal rate.

Tax-efficient
Flexible income drawdown is tax-efficient, particularly where you wish to ‘phase in’ the use of your pension savings to provide that income. Any money left in drawdown on death is subject to a 55 per cent tax charge, whereas any untouched pension fund money (pre age 75) can pass on to your beneficiaries free of tax.

Once you go into flexible income drawdown you can no longer make tax-efficient pension contributions, so you should look to maximise all allowances, including carry forward, this tax year.

Flexible income drawdown is a complex area. If you are at all uncertain about its suitability for your circumstances we strongly suggest you seek professional financial advice. This is a high-risk option which is not suitable for everyone. If the market moves against you, capital and income will fall. High withdrawals will also deplete the fund, particularly leaving you short on income later in retirement.

At a time when people are being squeezed by the taxman, anything that helps save tax should be considered, and the potential to avoid the 55 per cent tax charge on part of those savings on death could result in significantly more of their estate being passed on to beneficiaries.

Flexible income drawdown is a complex area. If you are at all uncertain about its suitability for your circumstances you should seek professional financial advice. Your income is not secure. Flexible income drawdown can only be taken once you have finished saving into pensions. You control and must review where your pension is invested, and how much income you draw. Poor investment performance and excessive income withdrawals can deplete the fund.

‘I wish I’d started saving for retirement earlier’

Posted on April 30, 2013 by - Uncategorized

New research shows why many older UK adults have many money regrets

Research from Standard Life has found that UK adults have many money regrets. But when asked what one thing, if anything, they most wish they had started doing earlier to be financially efficient with their money, saving for retirement came top of the list. Nearly one in seven (15 per cent) UK adults said they wish they’d started saving for their retirement when they were younger.

Today’s baby boomers
And if you ask those aged 55 plus, today’s baby boomers, then an even higher number – one in five – say this is their biggest regret. This figure rises further among adults who are saving into a personal pension rather than being part of a workplace scheme, with a quarter (25 per cent) wishing they’d started saving earlier, compared to just 13 per cent of those saving into a workplace pension.

Impact on future finances
Hindsight is a wonderful thing, but we can all learn from those who are older and wiser. The earlier we start saving, the bigger the impact on our future finances. Someone who starts saving £100 a month at age 25 could receive an income of £3,570 per annum by the time they are 65. Using the same assumptions, someone saving the same amount from age 40 would have a pension income of only £2,000 per annum at the same age [1].

Important not to panic
For those of you who feel you’ve already left it too late, the important thing is not to panic and save what you can now. And those of you who are not already saving through a workplace scheme or about to be automatically enrolled into one should find out more about personal pensions if you don’t want to end up with the same regrets as many other personal pension savers. These days most personal pensions are really flexible, so you can increase, decrease or stop and start contributions to suit changes in the future.

The challenge of saving efficiently
It’s important to take advantage of whatever opportunities you have to increase your pension contributions. Remember, with pension plans, the government contributes whenever you do. So if you are a basic rate tax payer, in most cases for every £4 you save in a pension, the Government adds another £1. And if you’re in a workplace scheme, your employer is likely to be topping up your contributions too. So consider increasing your regular pension savings as and when you can; or pay in a lump sum after a windfall such as a bonus [2].

Don’t think it’s ever too late to start saving for your retirement. And if you’re younger, don’t think that because you can’t save very much, there’s no point bothering. Even if you can start to save a small amount from a young age it can make a difference.

If you don’t feel you can put your money away in a pension just now, then you might want to consider investing in a tax-efficient Stocks & Shares Individual Savings Account (ISA) instead. This means you can still access your investment, while you also have the potential to help your money grow. There is no personal liability to tax on anything you receive from your Stocks & Shares ISA, so you might want to think about using as much of your £11,520 ISA allowance as possible before the end of this tax year. You can invest up to half of this in a tax-efficient Cash ISA, which you can earmark for more immediate concerns. Then you may want to consider
investing the rest in a Stocks & Shares ISA so you have the potential of greater tax-efficient growth over the longer term [2]. ν

All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2,059 adults. Fieldwork was undertaken between 25 – 28 January 2013. The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+).

[1] All pension figures are sourced from Standard Life and are based on an individual retiring at 65, making monthly pension contributions, assuming a growth rate of 5 per cent per annum, inflation of 2.5 per cent per annum, an annual increase in contributions of 3 per cent and an annual management charge of 1 per cent. The income produced is based on an annuity that does not increase, paid monthly from age 65, and this will continue to be paid for the first five years even if the individual dies.

[2] Laws and tax rules may change in the future. The information here is based on our understanding in April 2013. Personal circumstances also have an impact on tax treatment. All figures relate to the 2013/14 tax year, unless otherwise stated.

You’ve worked hard for this; now’s the time to enjoy it

Posted on April 30, 2013 by - Uncategorized

Start your retirement by celebrating your newfound freedom

Some pensions allow you to switch your money into lower risk investments as you near retirement date, which can help to protect you from last-minute drops in the stock market. However, doing this may reduce the potential for your fund to grow, plus your fund cannot be guaranteed because annual charges may reduce it.

Obtain an up-to-date pension forecast
With only months to go before you start accessing your pension, it’s important to get a very clear view of the level of income you can expect to receive. Contact your pension provider or providers for an up-to-the-minute forecast of your tax-free lump sum and income. You should also request a State Pension forecast, which will come complete with details of your basic State Pension and any additional State Pension you will receive. In addition, find out when you’ll be eligible to take your State Pension in the light of changes to the State Pension Age.

Also think about other sources of income you might be likely to get when you retire. These could include income from investments, property or land, part-time employment or consultancy, or an inheritance. Having as full a picture as possible will enable you to make detailed and practical final decisions about exactly how you want to take your pension income, as well as allowing you to make more accurate plans for your new lifestyle.

Choose how to take your pension
Although you may already have given some thought to how you want to take your pension benefits, it’s worth reviewing your plans at this point. Circumstances can change – for example, you might have received a significant inheritance or you may have been diagnosed with a medical condition, and former plans may no longer be quite appropriate.

You can either take your pension as an annuity, as income drawdown or as a combination of the two. With any of these options, normally you’ll also be able to take up to 25 per cent of your fund as a tax-free lump sum.

Additionally, now that the compulsory maximum annuity age no longer applies, you can decide to defer taking your pension. By keeping your pension pot invested there is an opportunity for further growth. However, you should think about the risks involved and look to de-risk as much as possible at this point. Investments can go down as well as up and your pot will be affected by the ups and downs of the markets. There can also be tax benefits but, as this is a complex decision, you should obtain professional financial advice – and remember, you may get back less than you invest.

Tax matters
Most people pay less tax when they retire, but it’s worth considering your tax position at this stage. Although you can normally take up to 25 per cent of your pension fund tax-free, any income you receive from it will be subject to tax under the Pay As You Earn (PAYE) system.

Meanwhile, if you’ve taken the option of income drawdown, you may be able to adjust the income you take to minimise the tax you pay. For example, if you plan to do some consultancy work or continue working in a part-time capacity, you could think about reducing your income withdrawals to stay within the basic rate of tax. Bear in mind that tax regulations can change and tax benefits depend on your personal circumstances.

Additionally, keep your savings and investments as tax-efficient as possible with products such as Individual Savings Accounts (ISAs) and offshore bonds.

You’ll also stop paying National Insurance contributions when you reach State Pension age. If you decide to continue working, whether full-time, part-time or on a consultancy basis, it’s a good idea to contact the tax office to make sure contributions aren’t still being deducted.

Prepare for life after work
As well as sorting out your finances, don’t forget to think about how your life will change when you retire. Even if you intend to keep working part-time, you’re going to have much more free time to enjoy.

Planning these first few months will help you set the tone for your future. Perhaps there’s somewhere, or someone, you’ve always wanted to visit. Maybe you want to learn a new sport or leisure activity, but have always had too many commitments. You might even want to start the search for that perfect retirement bolthole. The financial planning you’ve been doing for years all starts to bear fruit now.

Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor.

New higher flat-rate state pension

Posted on April 30, 2013 by - Uncategorized

One of the biggest overhauls of Britain’s pension system in decades

The Government recently announced that up to 400,000 more Britons will qualify for a new higher flat-rate State Pension and they’ll introduce the reform a year earlier than expected. The simplified scheme will provide a weekly flat-rate payment of £144.

The date has been moved forward to April 2016, and is one of the biggest overhauls of Britain’s pension system in decades. The current system includes a basic pension, a State Second Pension and/or some means tested pension credit. From 2016 this will all be merged into the universal flat-rate payment.

FOOL’S GOLD

Posted on April 30, 2013 by - Uncategorized

Demystifying some of the key fund management concepts

We understand that the fund management industry has an array of jargon that can confuse both the novice and well-seasoned investors. Here we aim to demystify some of the key concepts.

Fund types
Funds exist to enable many investors to pool their money and invest together. This allows them to achieve economies of scale when buying stocks and diversify their exposure to a variety of stocks, rather than buying each one individually.

Funds are often known as ‘collective investment schemes’. These come in a number of guises, but largely fall into two key categories: ‘open-ended’ or ‘closed-ended’. In the UK, the most common types of open-ended funds are unit trusts and investment companies with variable capital (ICVCs), also known as open-ended investment companies (OEICs). Unit trusts and OEICs have different legal structures: one operates under trust law and issues ‘units'; the other operates under company law and issues ‘shares’.

However, they share a common characteristic: the number of units (or shares) is not fixed, but expands and contracts depending on the level of investor demand – hence the name ‘open-ended’.

Another name for this kind of investment scheme is ‘mutual fund’, a term which is commonly used in the US. Because these funds are open-ended, the price at which they can be bought and sold relates directly to the underlying value per share of the entire portfolio.

Investment trusts are an example of a ‘closed-ended’ investment scheme. The defining characteristic of these is that the number of shares on offer does not change according to investor supply or demand, but is limited to the amount in issue. These investments are bought and sold on the stock market and can trade at a premium or discount to the underlying value per share of the portfolio depending on the level of supply and demand for the shares.

Investment concepts
‘Long only’ is one of the most common investment styles in fund management. It refers to buying a basket of stocks and/or bonds with the aim of generating returns through an increase in the price of the underlying holdings and from any income generated by these holdings.

‘Absolute return’ is a style of investment which aims to produce a positive return in all market conditions. It involves quite sophisticated strategies, including the use of derivatives to create short positions where the manager seeks to profit from a fall in the price of an underlying security.

Asset classes
Investments can usually be made in a number of different asset classes, such as stocks, bonds, currencies and cash.

Multi-asset funds may adopt ‘long only’ or ‘absolute return’ strategies. Typically they invest across a number of different asset classes, especially those that do not move in correlation, and thereby attempt to reduce the volatility of returns.

Active management involves trying to select a range of investments with the aim of outperforming a particular benchmark index. The ultimate aim of active managers is to generate positive ‘alpha’, i.e. invest in stocks that outperform the market and return more than is expected given the perceived level of risk the shares carry.

Passive management involves trying to replicate the performance of a particular index, such as the FTSE All-Share. Tracker funds are a form of passively managed fund.

Not putting all your eggs in one basket
Diversification is the technical term for ‘not putting all your eggs in one basket’. In theory, stock-level risk can be reduced by holding about 20 to 30 different stocks, so that a downturn in the fortunes of one holding may be mitigated by the performance of other holdings in the fund.

Additional diversification across countries, sectors and asset classes is needed to reduce macroeconomic and political risk.

Channelling investments
Asset allocation involves channelling investments across asset classes, geographic regions and/or market sectors. A weighting toward bonds might be increased to boost a portfolio’s income, for example, or greater investment might be made in emerging markets for those seeking growth who are prepared to accept a higher level of risk.

Company share prices
A ‘bottom up’ approach focuses on the prospects and valuations of individual shares while a ‘top down’ approach focuses on broad economic issues or market themes that have the potential to influence company share prices. Many managers may incorporate both into their investment processes, but usually have an emphasis on one or the other.

Investment biases
Growth and value describe certain investment biases adopted by funds and fund managers. A growth manager will look for stocks with good earnings momentum, but be careful not to buy when expectations are too optimistic (i.e. stocks are highly priced). Small and mid-sized companies from flourishing industries tend to be good growth candidates. A value manager ideally looks for attractively priced businesses that have fallen out of favour with the market and have been neglected, but whose fortunes are expected to change. ν

Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.