What kind of return do you need from your investment?
A further consideration is whether you want a fixed or variable return. Variable returns can be a problem if you are heavily reliant on them, e.g., as a major source of retirement income. So this is a very important decision.
Fixed returns, which go hand in hand with investing for a fixed period are attractive if you expect returns on other competing investments to fall.
If in fact, the competing returns rise over the period, you will lose out so do not assume that choosing a fixed return is necessarily less risky than a return, which can vary.
Fixed returns can lose value
Even fixed returns can lose value, in terms of what they can buy if prices rise. However, there are a few products offering index-linked returns which protect your investment against the impact of inflation are available.
How is the return taxed?
You need to marry your personal tax treatment to the tax treatment of the investments you choose. Some investments and savings have particular tax advantages for certain types of investor. Specific general points to consider are to look at the after-tax (net) return you will get personally, given your income tax rate and capital gains tax position and not the before-tax (gross) return.
Non-taxpayers gain nothing extra from tax-free investments.
It is more convenient for non-taxpayers to receive returns from which no tax has been deducted than to have to claim back such tax.
Tax-free returns are especially valuable to higher-rate taxpayers. Even if your income is taxed, you can often make capital gains without having to pay any tax on them because of the generous tax allowances.
Income from most types of savings is taxed only at the savings rate.
Basic-rate taxpayers have no further tax to pay. Higher-rate taxpayers have extra to pay. Non-taxpayers can, in most cases, reclaim the tax already deducted and starting-rate taxpayers can reclaim some of the tax. This treatment applies to interest from bank and building society accounts, income from annuities and interest from corporate bonds.
Dividends from shares and distributions from unit trusts and OEICs are taxed in a special way. Even non-taxpayers pay some tax on this type of income is payable unless they invest through an ISA.
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