Understanding investment products

There are a number of different types of investment products available to investors in the UK.

Tax-efficient investments

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

Stocks and Shares ISAs

A stocks and shares ISA is a tax-efficient investment account 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 is a maximum annual ISA allowance which can be invested in either a stocks and shares ISA or a cash ISA or a combination of both.

Tax treatment depends on your individual circumstances and may change.

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Pensions are a tax-efficient way to build up your own pension fund by holding investments. When you save into a pension, you'll also get tax relief on what you pay in, depending on your tax status. You can access your pension fund once you reach minimum pension age, which is currently 55 (it's changing to 57 from 2028). You have a number of options when you reach this age. You could take 25% tax free cash as a lump sum, choose to take all of your pension fund in cash, or you could take cash in lump sums as and when. You could also leave your money invested in your pension or you can buy an annuity. Any cash you take out over the 25% tax free cash is taxed as income.

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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 is not eligible for a Child Trust Fund. 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.

Tax treatment depends on your individual circumstances and may change.

Other types of investments

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 may go 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 types of funds within investment bonds (e.g. with-profits or unit-linked). These 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

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, hence why the fund is ‘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 are 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 in a particular market, or the majority, to give you a return that reflects how the market is performing.

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Understand the risks

The value of an investment can fall as well as rise, and you may get back less than you invest. If you are not sure about investing, seek independent advice.

Bank of Scotland plc. Registered in Scotland No. SC327000. Registered Office: The Mound, Edinburgh EH1 1YZ. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 169628.