Please Help! with an Investment Bond

richp2k

So if I were to use unit trusts, how would that work? Sorry to seem thick! I understand about CGT and utilising ISA's, but what about income tax implications if i draw an income from a unit trust?

Thanks for your quick response again, it is much appreciated!!

richp2k

Sorry I meant to ask as well, if you could give me an example of a good Investment Bond. I can tell my adviser then of the comparison and see what he has to say about it! :rolleyes:

dunstonh

o if I were to use unit trusts, how would that work?

same as the bond. The same funds are available. its just a different tax wrapper so tax is handled differently.

but what about income tax implications if i draw an income from a unit trust?

basic rate taxpayers have no further liability for income tax with unit trusts (unless over 65 and earning more than £21,800 a year). So, whether you draw the natural income or whether you draw a fixed regular amount (with natural income reinvested), the tax will be the same. Each April you get a new £7200 ISA allowance so you can move £7200 from the unit trust into the ISA (known as bed and ISA). So, this means eventually the lot will be wrapped up in the ISA which is always desirable.

By doing bed and ISA on an amount of £7200 you will never have to worry about CGT as you have a gains allowance of £9600 a year.

Sorry I meant to ask as well, if you could give me an example of a good Investment Bond

Norwich Union is a frequent one that comes out top. Clerical Medical is another. However, it should be noted that advisers get different terms so he may not get the same terms I get. However, the CM and NU investment bonds can get a reduction in yield (RIY) of better than 5% so that gives you a benchmark to the Sterling version (although they too have a version which can come out well priced. I just checked a bit of research I did last week and they came out 5th with an RIY to 4.9%).

richp2k

I can't thank you enough for your help. Its fantastic.

I'm still a little confused on the tax issue though. My apologies! Must be my age! If I was to withdraw then £525 as a regular amount, would it be taxed at the basic rate? I'm just over 65 and retired, so have no regular earnings. It sounds like this may be the best option for me.

dunstonh

If I was to withdraw then £525 as a regular amount, would it be taxed at the basic rate?

No. It would be treated as return of capital. Think of it of having £42,000 in a bank account and drawing £525 by cashpoint.

The unit trusts have tax deducted at source which equals basic rate tax. So, there is nothing further for a basic rate taxpayer to pay.

EdInvestor

richp2k wrote: »

If I was to withdraw then £525 as a regular amount, would it be taxed at the basic rate? I'm just over 65 and retired, so have no regular earnings. It sounds like this may be the best option for me.

Returns in an equity (stocks and shares) unit trust come in two forms: dividends (like interest on cash) and increases in the capital value. Dividends are effectively tax free to basic rate taxpayers. (They come with a tax credit which covers the notional 10% tax).

Realised (ie cashed in) capital gains are taxed at 18%, BUT you have an annual tax free allowance of 9,200 pounds, so if you want to take out 525 pounds a month, you will be well within the allowance, so no tax to pay at all.(There is no tax to pay on gains that are not cashed in in a unit trust, unlike an investment bond).

Bonds and property funds are treated a bit differently: with these , you have to pay 20% savings tax on the interest/dividends - effectively they are treated like cash.Once you have moved all the funds into your ISA @7,200 a year, all the earnings and capital gains will be tax free.

If you have bond or property funds, it's obviously best to move them in first to avoid the 20% tax on the divis.

chihiro

hi
Do you think that the fix rate Bonds are a risk in that moment please?is it conected with the market?

dunstonh

chihiro wrote: »

hi
Do you think that the fix rate Bonds are a risk in that moment please?is it conected with the market?

Depends on what type of bond you have. The term "bond" is used so frequently and incorrectly that it can mean a deposit account, tax wrapper or type of investment.

raschurchill

We been advised to invest 100k in to the above fund. looking at the deductions bit it states " putting it anohter way, this would have the same effect as brining the investment growth from 5.35% a year down to 3.1% a year" - is this being greedy ?

thanks in advance for your help

Reaper

That's because you are paying lots of charges. You probably told your advisor you were afraid of losing the capital so he has come up with a fund with guarantees built in. The trouble is those guarantees are not free. You will pay for them in charges and reduced returns (as the fund manager has to be very cautious - very little of it is currently in equities).

Also it is a multi-manager fund so you are paying the overall fund manager plus the charges for the investments they select.

If it were me I would suggest investing a smaller amount of money that you were prepared to take more risk with and investing it directly in funds to remove those layers of charges. But each to their own.