Common Investing Vehicles

Most people use some sort of investment vehicle that invests on their behalf. Here we go through the basic characteristics of the most common ones.

Unit Trusts and Investment Trusts

These are funds that predominantly invest in shares. Some of them may invest in a particular industry, country or region whilst others will invest in the whole market. They are also responsible for most of the colourful adverts in the weekend papers. These are the most flexible type of product, allowing you to get your money out at any time. Find a unit or investment trust.

Pensions

Pension funds invest in shares, bonds, property and cash. You get tax relief on money you invest in a pension but there is a catch. In fact there are two of them. First, you can't touch your money until you retire. Secondly, you have to use your money to buy an annuity which means you give up all your capital in return for regular income. A pension is usually seen as the standard way to save for your retirement but in reality it is just one of the options. Unfortunately, their obscure nature and inflexibility means that the charges on them tend to be quite high. Find more information on retirement and pensions.

ISAs

An ISA is not actually an investment product although it often gets confused with one. It is just a tax-free wrapper that sits around an unit or investment trust. At the moment you can put in £7000 in each tax year. Most ISAs are done in a rush in March and April but it makes more sense to steadily drip your money over the course of the whole year. Find an ISA.

With-profits bonds and endowment policies

These products have been much criticised in recent years. And rightly so. They are highly inflexible beasts that require you to commit to investing a regular amount over a long time. That's no bad thing in itself but if you do not manage to keep up the payments you end up paying heavy penalties. These products are 'sold' rather than being bought. Like pensions their inflexibility and lack of clarity tends to result in high charges.

With-profit bonds attempt to smooth out the return of the stock market by awarding annual bonuses that cannot be taken away. But the largest bonus is kept right until the end and many people don't get that far. And as we saw earlier, over long time periods the stock market tends to rise so these 'guaranteed' annual bonuses offer little value. Therefore you pay a lot in charges for something that probably won't be necessary. If that wasn't enough the guarantees often turn out to be less than rock-solid, as the events surrounding the Equitable Life have demonstrated. This article delves into their complexities.

So where does that leave us?

What we want is a simple, low cost investment with some tax relief to boot. Therefore for most people a unit or investment trust, probably in an ISA, makes the most sense. That's the focus of the remaining articles in this section. However, if you're prone to sudden spending rushes or have an intense aversion to even the tiniest prospect of your losing money then some of the other routes may be more appropriate.