If you’re looking for a place to put a lump sum, you could wonder if an investment account is a suitable place to do so. But what exactly is an investment account, and how does it work? Here, we look to answer those questions specifically from the viewpoint of a pensioner who has a specific set of investment requirements.
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What is an individual investment account?
An individual investment account is an account you open at a bank that allows you to make investments into other financial products. For example, those investments could be into stocks and shares, bonds, investment trusts or REITs. There is no upper limit on the amount of money you can invest, like a Stocks and Shares ISA, so it can be an excellent place to put your money if you have the funds to do so. By putting your money into such investments, the hope is that you will see your money grow as those investments go up in value and through dividend income.
However, importantly, you need to have the capacity to bear the risk that comes from investing. As a pensioner, you have a shorter investment horizon so have less ability to recoup losses you may incur. With any investment in stocks and shares, the value of the funds you put in may fall as well as rise.
How Does An Investment Account Work?
You can open an investment account with a variety of high street banks or online platforms. How each investment account will work will differ depending on the provider you choose. However, they will have several characteristics in common.
Firstly, to open an investment account with the bank, you will need to complete an application and invest the amount you are willing to spend. From there, you will need to select the purchases you want to make your providers online platform over the phone. Your provider or bank acts as the intermediary between you and the investments you want to make.
Your account will be subject to specific fees that your provider sets. For example, they may charge a monthly fee or a fee on any trades made. You can then choose to invest a little more money each month or simply use the funds in that account to invest where you think wise. You can then see your money grow if those investments go up in value or you receive dividends from stocks you hold or interest from bonds you buy.
Pros of an Investment Account
Unlimited Amount
A big bonus of opening an investment account with a bank is that you can invest in an unlimited amount. This can be particularly beneficial to those with more significant amounts that they want to invest for growth. Other widely used investment vehicles, like Cash ISAs or Stocks and Shares ISAs, have an upper limit on the amount that you can invest.
Unlimited Upside
Perhaps the most significant advantage of an investment account is the fact that your investment can grow an unlimited amount. Depending on the investment choices you make in terms of shares or bonds to buy, you can materially increase the amount you initially invested.
Control Your Investments
Opening an investment account with the bank allows a person to have complete control over the investments that they make. This may not be suitable for all pensioners. However, for those that understand the financial markets or have a keen interest in investing, it can be a massive benefit to be able to choose exactly where your funds are invested.
Cons of Investment Account
Downside Risk
You cannot dismiss the benefits of an investment account, but you must weigh them up against the possibility of losing money, which is a common risk associated with investing. Particularly in the case of pensioners, seeing a fall in the amount initially invested may not be an eventuality that you can risk. Pensioners who cannot risk losing any value in their funds may not, therefore, see this as a suitable place to put their hard-earned cash.
Knowledge
While taking control of your money by choosing your own investments is a plus point, you should only make investments yourself if you fully understand them. Running a portfolio of stocks and shares in a diversified portfolio can be a complicated matter. As a result, opening an investment account that will see continued growth, is something that requires a vast amount of knowledge. If you do not feel comfortable making such decisions about where and what to buy within your investment account, this may not be the right solution for you.
Fees
As with any financial project, there will be fees that the account holder will have to pay. This should be taken into consideration when opening an account. These can start to add up more quickly than can sometimes be realised. As a result, fees can impact the value of your investments if you do not thoroughly consider these before opening an investment account.
Investment Accounts And Their Suitability For Pensioners
As with any financial product, suitability for pensioners will depend on a specific pensioner’s needs and requirements. For some, the disadvantages are too significant a risk to take with their money. For others, the risks are minimal, particularly if they have large amounts of cash saved up.
In short, while pensioners can use investment accounts, you must fully comprehend first that the value of their investment may fall as opposed to rise. Given that pensioners have less time to recoup those losses, an investment account may not be a suitable place to put money.
