Originally posted by: otispunkmeyer
i have some dough saved up and want to get more out of it.
i can either take out an online saver with HSBC which will pay 6.08% (gross)/ 6.25% AER (not that i know the differece) on whatever is in the account on a monthly basis.
OK.
The 'gross' interest is the amount of interest you get per year. So in this case, if you put £2k into the account, you would get 6.08% of that (£121.60) interest over a year. As the interest is paid monthly that works out at £10.13 per month.
The 'AER' (Annual equivalent rate) takes into account the fact that you can earn interest on the interest if you don't withdraw it. So, if in the first month you leave the £10.13 interest in the account, you get a bit more interest the next month, and so on. By the end of the year you get 6.25% of the original deposit paid (£2k will have become £2125).
'Gross' interest is the total amount of interest paid by the bank. Interest counts as income, and you will have to pay income tax on it. If you earn less than £40k then that's 22% (bringing your actual interest rate down to 5.5%), or if you earn more than £40k, 40% (bring the rate down to 3.75%). If you earn less than £5k a year, your income is tax free - however, you will have to fill in a tax exemption form, because the bank will automatically deduct 22% tax, unless they have written authorization not to.
If you are earning, rather than putting money in a savings account you should instead consider an 'Individual savings account' or ISA. You can deposit up to £3k per year into an ISA, and the interest is completely tax free. You can only pay into one ISA account per year, and if you make a withdrawal you can't put the money back in.
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For the more experienced investor you may want to consider stocks and shares.
The traditional way to buy shares is to contact a broker, and instruct them to buy/sell the shares on your behalf. Nowadays this can all be done online. You pay a commission fee (usually around £15 per transaction) and a 0.5% purchase tax (stamp duty) on the price of the shares. Every year or quarter, companies may pay a 'dividend' to their shareholders (i.e. a share of the profits). Traditionally, these came as a cheque - but with online accounts, the money will automatically be credited to your account.
Tax with shares is tricky. You have to pay income tax on dividends (some of which will have already been paid by the company), and you also have to pay capital gains tax on any profit you make because the shares go up in price. (Although you get the first few £k of profit tax-free).
Your broker may offer you a 'contracts for difference' (CFD) account, or a 'margin' account. DO NOT TAKE THEM UP ON THIS OFFER. CFDs/margin are not for the noobie - your losses with these investments are not limited to your initial deposit (so a bad trade, could mean threatening phone calls demanding cash, before they send the bailiffs round) - in some cases, losses can be
unlimited.
If picking stocks isn't for you. Then why not buy stocks that someone else has picked for you?
Probably the easiest way is to buy shares in an 'index tracking fund'. You pay your money into a fund, and the fund buys shares in a group of companies forming an 'index' - e.g. the FTSE 100 - the 100 biggest companies in the UK. This way your risks of choosing a bad stock are reduced, and deposit and annual fees are very low (e.g. 0.75% deposit fee, no annual fee)- because it's not very difficult to run such a fund.
You can buy specialist funds - where a stock manager chooses what stocks to buy and what to sell. These might give better returns, but they often charge big fees - e.g. 3% deposit fee, 1.5% annual fee. I don't recommend these. I used to have about £20k in such funds before I realized they sucked.
The great thing about funds is that you can make them income tax-free by putting them in an ISA. If you get a fund based ISA, you can put up to £7k in per year, and the dividends, etc. will automatically be reinvested tax free. You can't have a 'cash' ISA and a 'stocks & shares' ISA in the same year - so you have to choose one before making any deposits.
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