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1) The Inflation RiskSavings and investments that expose you to inflation risk usually fall into the "safe" category. For example, we all tend to think of building societies deposits accounts as risk free, but are they effectively so? If you are worried about the risk of losing your original capital of the inheritance, then provided you stick to the well-regulated UK building societies, you can put your money on deposit and your original capital will indeed be safe.The capital will not diminish; indeed it will grow, assuming income is reinvested. However the growth will be modest, and in real terms, it may even be negative, depending on the rate of inflation. For the next to five years inflation will keep an average of , 5% per year. This doesn't mean I will have to ignore deposits accounts, since in fact they play a very important part in providing an easy access home for emergency funds and for short-term savings where capital security is the primary goal. Nevertheless, coming to a conclusion, over the medium to long term, deposits accounts may give rise to capital erosion.A number of different measures of UK Inflation are published by the ONS, but by far the most popular and widely covered is the retail prices index .
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) Capital RiskHistorically if you wanted to match or beat inflation over the long term you would have had to invest in equities. However with equities, unless your fund offers a guarantee (and this can be costly, such as in the case of protected funds), your capital is certainly at risk. Therefore if there is a statutory wealth warning that the investment can go down as well as up, it must be taken seriously, especially being a student.) The importance of spreading riskRisk can be managed in different ways. It is possible to concentrate it in a single investment or spread it over a wide range. In my specific case I have to protect myself further from risk by diversifying into different asset classes, for example by instead of just investing in different types of equities, I could include some bonds, gilts, deposits and so on. These behave in a different way from equities and therefore do not share the same vulnerabilities to certain economic cycles.4) Tax and investmentsThe UK tax system is incredibly complicated, making it very difficult to ensure that you do not pay more tax than you need. The first point to check is that you are making the most of your tax allowances. These apply per tax year, which runs from April 6 to April 5. The two concerning the case are§ Personal Allowance Aged up to 64 £ 4, 615 (00/00)§ Capital Gains Tax annual exemption of £ 7,700 (00/00)I. Income tax ratesLower rate 10% on first £ 1880Basic Rate % on next £ 7,50Higher Rate 40% over £ ,400II. Capital Gains Tax (CGT)You pay capital gains tax on any profits you make on your investments over the annual capital gains allowance, set at £7,700 for 00-00. Those gains are added to your income to determine the rate of tax youll pay. You pay · 10 per cent if your total income and gains are within the 10 per cent tax limit · 0 per cent if the total is below the limit for basic rate tax · 40 per cent if the total is above the higher rate tax thresholdYou get a reduction in the amount of the gain on which you have to pay tax according to how long you have held the asset since 5 April 18 and whether it is a business or non-business asset. The tax regime for business assets is by far the more favourable of the two.(CGT for 00-00-Business Assets below)Whole years Chargeable Equivalent tax rate (%)asset held gain (%) for higher-rate CGT payer0 100 401 100 40 100 40 5 84 0 65 85 46 80 7 75 08 70 8 65 610 60 4 Business assets include· Assets used in an individuals own trade. · Shares in an unlisted trading company. · Shares in a listed trading company where the shareholder can exercise at least 5 per cent of the voting rights.Profits on some non-business assets are exempt from CGT. The main exemptions are for, in the specific case· Government gilts· Various savings and investment schemes, including National Savings Certificates, Peps, Isas, venture capital trusts (VCTs), enterprise investment schemes (EIS).A way to cut down the CGT bill isOffset losses against gains consider disposing of assets that have shown a loss to set against a taxableBed-and-breakfasting, whereby you used to be able to sell assets and buy them back the next day to avoid CGT on long-term investments, is now outlawed within 0 days of the original sale. But you can still sell the assets and · Immediately buy something similar. · Buy an option to protect against a price increase over that 0-day periodIII. Stamp DutyStamp duty is a tax charged when you buy shares, land or property. You pay 0.5 per cent in stamp duty whenever you buy UK shares. Thats £5 whenever you buy £1,000 worth of shares. It is levied on all UK share purchases, even those made under the umbrella of tax-free products such as ISAs and pensions. It is estimated that it costs everyone with a pension scheme £ a week in transaction charges. You dont pay UK stamp duty if you buy shares quoted on overseas stock exchanges.At present, National Insurance for employees becomes payable on earnings above £8 per week, or £4,615 a year, up to £585 a week, or £0,40.For 00-0, the level of NI payable on earnings between those two figures will be 10 per cent.From 6 April 00, this will change. The ceiling will be raised in line with inflation, to £0,40.In addition, in the 00-04 tax year, NI rises to 11 per cent between the lower and upper earnings limit. Earnings above the upper limit will face an additional 1 per cent charge.Effectively, this raises the higher rate of tax from 40 to 41 per cent.IV. National InsuranceV. Tax efficient investmentsPaying tax is unavoidable when youre planning on making money. But there are ways of reducing the chunks taken out of your hard-invested earnings. Here are a few of the possibilities. National Savings CertificatesThese pay tax-free interest, making them a useful shelter for higher rate taxpayers. Individual Savings Accounts (ISAs)You are allowed to contribute up to £7,000 in each tax year and your contributions are sheltered free of income tax and CGT. Investments can be in cash, shares or insurance-based products.5) Investment advisoryThere are two major factors that affect your return. The first is performance and second is the level of charges. This includes purchase costs, the regular charges imposed by fund management groups and if relevant, the advisor's fees. In this case I will be researching on my own, and I will make effective use of the key magazines for investors such as Investors` Chronicle, The Financial Times and specific websites such as www.investmentgateway.com and so on. At the same time I will make the effective use of the Internet investment resources in order to avoid further charges. 6) The attitude towards riskThe task is to quantify the level of risk and decide whether you feel comfortable with it. In other words to what extent I'm prepared to trade off higher risk against higher potential expectations and conversely higher potential losses? Portfolio theory can provide a guide to make this kind of decisions. If an asset like a bank deposit earns a fairly certain yield, that yield will be lower than the uncertain return on an asset like an ordinary share. The owner of the riskier asset is compensated for taking on greater risk by the possibility of much higher rewards. "The appropriate aphorism to encapsulate this concept might be "Nothing ventured, nothing gained." Younger investors like me, who are looking to save money on a regular basis, are likely to be less concerned about risk in the short term; if anything they will be looking for higher risk investments in order to take advantage of pound-cost averaging. According to my specific case the basic need for me is liquidity and therefore my investment goal must be focused towards a regular income. This means I will be settling in the low band of the pyramid of risk (see graph below) with its respective financial products. However my attitude to risk will vary since my other investment goal is a certain degree of capital growth (need to have the amount of 105000 plus inflation at the end of the term) and as mentioned before "Nothing ventured, nothing gained." This means at certain point I have too move to the adventurous band of the pyramid none the less trying to reduce that risk by diversifying the portfolio.
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