Investment products explained

There are a number of different types of investment products available to investors in the UK. Investment products are any products that are not deposit-based (savings, bank accounts and also National Savings products).

They can be direct investment, such as shares in a single company. Alternatively, they could be a pooled investment with other investors across a range of asset types, providers (as with Multi-Manager Unit Trusts) and currencies for greater diversification.

As investments involve more management and administration compared to deposit-based accounts, they generally incur costs when buying and selling as well as annual charges.

Tax-efficient accounts

The main types of tax-efficient investments are as follows:

Stocks and Shares ISAs

A stocks and shares ISA is a tax-efficient investment product that lets you put money into different types of investments including unit trusts, open-ended investment companies (OEICs) and investment trusts, as well as government bonds and corporate bonds.

You can also buy individual company shares and put them into your ISA. There’s a maximum annual ISA allowance which is set by HM Treasury each year.

Visit our Stocks and Shares ISA page for further details.

Pensions

Pensions are a tax-efficient way of holding investments with the specific purpose of building up your own pension fund, which is then used to secure an income and/or lump sum for you when you retire. If you save into a pension you'll also receive tax relief on what you pay in depending on your tax status. Your money will usually be locked away until you reach minimum pension age, which is currently 55 years old. When you draw these benefits you have the option to take part of your total pension fund as a tax-free lump sum, with the remainder paid to you as a taxable pension income.

Junior Stocks and Shares ISAs

A Junior Stocks and Shares ISA allows you to invest tax efficiently on behalf of any child aged under 18 who does not hold a Child Trust Fund.

However, from 6th April 2015, Child Trust Funds can be transferred into Junior ISAs with some providers.

The child will not be able to access the money held in the ISA until they reach 18 years old. Like other ISAs, there’s a maximum annual contribution allowance set by HM Treasury.

Examples of other investment types

Investment Funds

Investment funds are collective investment schemes which pool your money in with other investors to give you a stake in a ready-made portfolio. An investment fund can offer you an affordable way to invest in lots of different assets and, in many cases, without the pressure of making your own investment decisions. They make the process of investing a lot simpler for you.

Investment Bonds

Investment bonds are life insurance policies in which you can invest a lump sum, which goes into a variety of funds. They’re not the same as corporate bonds, premium bonds or fixed-rate bonds but are effectively a type of investment fund.

You normally have a choice of funds to invest in within investment bonds (e.g. with-profits or unit-linked). Both have the same tax rules: tax is paid on both growth and income accrued in the fund by the insurer. The unit value will rise or fall depending on demand.

Unit Trusts and OEICs

Essentially these are both types of pooled investments across numerous different assets and are managed by professional investments companies. There are hundreds of different funds available and they can offer an easy way to diversify your portfolio across different assets and even countries.

With a unit trust, a fund manager buys bonds or shares in companies on the stock market on behalf of the fund. The fund is split into units, and this is what you’ll buy. The fund manager creates units for new investors and cancels units for those selling out of the fund. The creation of units can be unlimited, which is why the fund is said to be ‘open-ended’.

OEICs (Open Ended Investment Companies) operate in a similar way to unit trusts except that the fund is actually run as a company. It therefore creates and cancels shares rather than units when investors come in and go out of the fund, but they still directly reflect the value of the assets that your fund manager has invested in.

Returns from the fund are paid through distributions. These can be monthly, quarterly or every six months, depending on the type of fund that you invest in. These distributions derive from the dividend payments received by the fund from the underlying shares within which they invest, or interest payments from bonds or even rental income in the case of property.

Investment Trusts

Investment trusts, like unit trusts and OEICS, are a way of investing in shares, bonds and property in the UK and elsewhere. They enable you to pool your money with other investors to invest in a range of assets to spread your risk. As a result, they should be lower risk than buying individual shares. But this doesn't mean there is no risk to your capital, and the risk will vary depending on where the trust invests.

Investment trusts have a more complex structure than unit trusts and OEICS. But, they appeal to some investors because they generally have lower annual charges than unit trusts and the potential for higher returns. They can also invest in a wider range of securities.

Investment trusts are set up as companies and floated on the London Stock Exchange. As with any company quoted on the stock exchange, investment trusts have to publish an annual report and audited accounts. They also have a board of directors to which the manager of the trust is accountable and which looks out for the shareholder’s interests. When you invest in an investment trust, you become a shareholder in that company.

Active or passive investment

If you’re placing your money into an investment fund, there are two main strategies you’ll encounter: active management and passive management. Debate has raged over the years as to which is the most effective way to invest your money, however there is a greater number of active funds than passive funds available.

Actively managed investment funds are run by a professional fund manager or investment research team, who make all the investment decisions, like which companies to invest in or when to buy and sell different assets, on your behalf.

Passive investment funds will simply track a market, and charge less in comparison. The funds are essentially run by computer and will buy all of the assets, or the majority, in a particular market, to give you a return that reflects how the market is performing.