Investing a windfall: Options

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The Independent Online
I have inherited a windfall of a few thousands pounds. I do not anticipate needing it for quite a few years. What can I do with my money?

If the thought of sinking your money into any equity-linked investment gives you the vapours, building society Tessas are currently paying about 7 per cent tax-free, as long as you stay the five-year course.

Alternatively, National Savings has a range of accounts suitable for risk-averse investors. The latest Capital Bonds pay 7.25 per cent annually fixed over five years.

If you want rising income and are prepared to tie up your money for up to five years, several building societies have launched escalator bonds. You get about 6 per cent this year and up to 11 per cent in the final year.

Depending on your age, earnings and what you are paying into your pension scheme each year, you can make extra lump sum contributions tax-free into a separate AVC (additional voluntary contribution) scheme.

There is a catch: you will receive none of your money until you retire.

But investment based on shares should show a better return in the long run - if you can stand the ups and downs on the way. The best way to invest in shares or managed funds - unit trusts or investment trusts - is through a Personal Equity Plan.

With PEPs, no tax is payable either on the fund under management, the income paid out, or any lump sum eventually paid out.

PEPs are subject to some constraints. For example, at least 50 per cent of a PEP investment must be in UK shares or an EU stock market.

Many companies have launched funds that match any rise in the stock market. But you get all the money back if the market falls over the five years. The downside is that part of your money will go to pay for the cost of that money-back guarantee, so not all of it is invested. And usually, although these guaranteed funds match any rise in the market, you don't get the annual dividend from the shares.

If you want all your money to go into more exotic markets buy an investment or unit trust that gives a spread of investment, but this will have to be outside a PEP.

It may not pay to repeatedly switch your investments in and out of funds, because the charges involved in doing so will often cost a large chunk of your money.

Even if you are prepared to risk your money, think in terms of a spread of risks. Some emerging market funds invest in a number of different countries, such as the entire Far East. When one economy is on the wane another may be on the rise. An even wider, and less risky, spread will invest in emerging markets on several continents.

More information: Money pounds acts, a guide to savings and other financial information. Annual subscriptions pounds 38.50, single copies pounds 4.24 inc p&p. Call 0692 500665 for card orders.

Chase de Vere PEP Guide, pounds 9.95 inc p&p, from Freepost, 63 Lincoln's Inn, London WC2A 3BR.

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