Why is having a savings account more important than having a cash account, and how does this relate to interest rates? 

At present, UK interest rates are low, which is reflective of the general economic uncertainty that’s being felt worldwide, and not just within the UK. So, at the moment, you’re getting very low interest rates offered by UK banks and building societies for their straightforward cash accounts.

Now we all need a cash account – after all, it’s where our wages go into and where our bills are paid from – but if we have an accumulating surplus every month then right now, it’s not working very hard for us in a mainstream checking / bank account.

That’s precisely the reason people set up savings accounts – because they have money spare every month, and they’d like it to be working harder for them and earning extra interest.

So, a savings account that offers a good rate of return, and allows you easy access to your money, is important – but only if you regularly have a little bit spare at the end of every month. Be sure to check about the rules to access your money – some accounts will ask for 30, 60 or 90 days’ notice before you can make a withdrawal for example, and they may also limit you to a set number of withdrawals in a 12 month period – so make sure you can access your funds when you need to by checking the terms of use before you set an account up.

Why is interest income important as it relates to savings accounts? 

Put simply, if you’re being paid interest then you’re earning money by keeping it with that particular financial institution.

The higher the interest rate offered, the more you’ll earn – but do check the terms of the savings account before you set it up; as in how many withdrawals are you permitted per annum, and what notice period do you have to give prior to making a withdrawal.

Our physical assets – like cars – depreciate in value over time, and having a good interest rate on our savings account helps us to afford the replacement costs every few years.

How would you break down the difference between bonds and gilts to someone with little to no financial expertise?

 A bond debt issued by companies (also known as corporate bonds) or the government (gilts) to raise money, in other words they are loaning stock in their company / country to raise investment funds. 

If you buy either a bond or a gilt you are, lending money to the issuing corporation or government. In return, the issuer promises to pay you a set rate of interest per annum on the amount you’ve loaned (these payments are known as a coupons), and to then repay your initial capital investment in full at a set date in the future (known as the redemption date).

Depending on how far in the future this date is set, corporate bonds and gilts can be either short or long term investments, and the amount of interest you will be offered is typically linked to the length of the loans (longer terms will usually mean higher interest payments). 

In short, corporate bonds are issued by corporations (companies) and gilts are bonds issued specifically by the British government.

What are the different types of gilts, and how do they pay?

There are different types of gilts, but the majority sold are conventional gilts. These conventional gilts normally pay a fixed coupon twice a year, and will mature on a set, fixed date in the future. However, you can also buy index-linked gilts, where both the coupon payment and the value of the bond change according to the Retail Price Index (RPI) - a measure of the rate of inflation. It’s also possible for you to buy undated gilts, where there is no fixed redemption date. Before deciding which type to invest in, make sure you see a financial adviser.

Gilts typically pay coupons twice a year, whereas corporate bonds are more likely to pay coupons annually. They both offer a source of fixed income and investment options; the opportunity for capital growth is usually modest.

Before buying any bonds or gilts, you should make sure to take professional financial advice from an accredited expert, so that you can ensure you make your decisions only after receiving the best possible advice.

Can you explain why bond prices can fluctuate daily, and what factors lead to changes in bond prices? What are the risks you run with purchasing bonds?  

Several factors influence the bonds price, including yield, prevailing interest rates and the bond’s rating. When interest rates rise, bond prices fall, and bond investors, will feel the pain. Overall when bond prices rise, yields fall – and the reverse is also true. So, when money flows into bonds, it pushes prices higher and yields fall.

Because it’s a complex series of factors and scenarios that affect bonds, it’s best to talk to an expert financial adviser before making any purchases. Make sure you don’t risk any of your savings without talking to the professionals first.

In addition to the general rise and fall of bonds, investors also face the risk that the borrower (the company invested in) will default on their obligation to pay the interest or the capital back. It’s vital to only buy bonds in companies with good trading histories because of this, and a good financial adviser will make sure you’re not left exposed to unnecessary risk by ensuring that you are only looking at companies that match your overall risk profile.

Similarly, can you describe how gilts fluctuate?

Gilt prices will fluctuate from day-to-day in the market, and it all depends on the outlook for interest rates. The term “gilt” or “gilt-edged security” is a reference to the primary characteristic of gilts as an investment: their security.

This is a reflection of the fact that the British Government has never failed to make interest or principal payments on gilts as they fall due. Therefore, gilts are generally considered to be an extremely secure form of investment.

Each gilt is a UK Government liability in sterling, issued by HM Treasury, and listed on the London Stock Exchange.

Additionally, what are the risks of a buying gilts?

A gilt is generally considered to be a really secure form of investment, and your main risk is that the interest rate you earn could be lower than those offered by other financial institutions for a similar investment value and length of term. You should always check with a financial adviser before making any form of investment, even into Government gilts, to be sure you’re making the right decision for you.


 

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Seventy Financial Planning
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Haggs Road, Follifoot, Harrogate,
HG3 1EQ

01423 611004

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