40k - options for income with some growth

nitwit_2

Hi

Not sure if this should be in retirement planning, on balance here seemed more appropriate:

Any suggestions regarding the investent of a ~40k lump sum for a retired couple wanting to take an income from it with some capital growth.

Advice is also being sought from an IFA and a couple of high street instituitions - any thoughts on options to sense check the other advice being sought.

Links to any other threads appreciated, current searching has not returned any similar scenarios.

Thanks

dunstonh

The IFA will be able to destroy the high street institutions as far as product offerings go. However, the high street may have smarter equipment and a better sales patter so do be careful not to fall for that. The banks (assuming thats who you mean) do have some products that are designed to be easy to sell and have some some key features which do sound quite good. However, under skin and behind the scenes they are pretty awful and expensive. Most of that is hidden though. Also remember that the IFA will have the same bank products available to him/her. If they are that good, the IFA would recommend them.

There are about 10,000 investment options available to the IFA (or yourself if you choose to DIY). Depending on your tax status, other goals, risk profile, accessibility of funds etc, the options would vary.

There isn't enough for us to go on i'm afraid. Did you have any figures of what you expect to get in your own mind?

nitwit_2

Thanks for the input.

A little third hand - i am posting on behalf of my parents, i can gather more info but was not sure where to start..

The lump sum is from a maturing private pension.

Age: mid 60's

Own their home

Attitude to risk - i think they want some security now looking forward. (Mum risk averse - Dad less so) They are thinking of selling their small share holding. I think cover for inflation is important?

dunstonh

The would probably be looking at an investment portfolio covering a range of areas but weighted towards the cautious side. Your mum's risk profile would need to be clarified and she some discussion on investments because if she is totally risk adverse, they are not going to get what they want from this money.

Tied advisors, from banks, cannot recommend investment funds so they would very much be putting the onus on your parents to choose funds and that is very risky. Take a look at http://forums.moneysavingexpert.com/showthread.html?p=1388360#post1388360 for what happens when you get advice from a bank.

At this stage, your parents need to really sit down with an IFA that deals in investment porfolio planning (note, not all IFAs are the same. Some focus on mortgages, some life cover. Some do little business in investments). They need a little education and understanding to help them decide. I'm afraid that going to banks isn't going to help.

EdInvestor

Avoid investment bonds.See the FSA site below for their very high charges. Salesman will tend to talk about their 5% "tax free income" - but this tax is just deferred, and the income may well be coming out of the capital.

www.fsa.gov.uk/tables

If they want to take income and capital growth, they should probably be looking for a mix of shares or funds which have decent dividends/yields.

These types of funds are good for income:

Equity Income funds* ( income c.4%)
Commercial property funds - now available in ISAs (income c.5-6.5%)
Corporate bond funds (income c.5-6%)

A mix of these would probably do the trick.

*I see the Equity Income fund manager at Inveso Perpetual has just taken three of the top slots in the Fidleity survey of most popular funds.He has a 17 year track record.


What shares do they have? Privatisation/ demutualisation ones? Many of these shares pay good dividends - and they are tax free to basic rate taxpayers. If they are used to holding this type of share, maybe they should buy more - it's one of the cheapest ways to get an income, as no fees and charges if you just hold the shares.

dunstonh

Avoid investment bonds.See the FSA site below for their very high charges. Salesman will tend to talk about their 5% "tax free income" - but this tax is just deferred, and the income may well be coming out of the capital.

www.fsa.gov.uk/tables

Absolute rubbish. Investment bonds can range from very cheap to very expensive. I have arranged bonds with negative reduction in yields over 5 years. In other words, there are no charges. Equally, there are some expensive bonds out there.

Basic rate tax payers have no further tax liability with a bond. A higher rate tax payer would have a liability but as it is deferred, it can be left until a time that the person is a basic rate tax payer. At which point there would be no tax to pay and the higher rate taxpayer avoids higher rate tax. Something that would not happen on a unit trust or an OEIC. Deferrment is a good thing, not a bad thing.

The income is coming from capital, which is why, if it doesnt exceed 5% pa, it doesnt exist as far as the tax man is concerned (in that year).

Bonds also have no CGT liability as that is taken care within the fund. £100k invested in June last year is now £111k with 5% withdrawn as well. That growth would have had a CGT liability in an OEIC/UT.

Bonds can also be used to reduce IHT liability. OEICs/UT cannot.

The same investment funds are today available in ISAs, pensions, collectives (unit trust/OEIC) and bonds. The only difference then is the tax wrapper and the charges and terms of that wrapper. At various times, each one of those wrappers could be the best option for one individual and the worst for another.

You cannot say one is better than the other outright every time.

Cook_County

This may be a silly question to ask, but following on the last post, if an onshore bond fund is subject to CGT within the fund (which on a figure of £40 an investor investing outside of a bond fund would not be liable too) would it not be better to choose an offshore bond fund where the roll-up is gross and the same 5% rules apply?

EdInvestor

I don't think we need to worry about tax too much with a 40k fund and the two of them.

2 x 7k Maxi ISA allownce for 2005 invested now = 14k (for the equity income funds)

2x 7k Maxi ISA allowance for 2006 invested in April = another 14k (for the commercial property funds)

Total 28k now tax free, capital and income.

That leaves 12k.Given the ISA allowances are now used I would tend to keep these in cash using a high interest account, and then put the money into cash mini ISAs from 2007 onwards, if the parents don;t want to use the money to top up the investment side in 2007 ( perhaops let them see how it goes..?)It probably depends how much of a cash buffer fund they have already aswell.

If you use a discount broker for the ISAs such as www.cavendishonline.co.uk, you will get all the main charges from the funds rebated.:)


Here's a list of Equity Income funds.

Trustnet fund list

Look to the right for 1,3 and 5 year performance .Parents no doubt will be pleased to see that no one lost money over the last 5 years in these funds, althought the stockmarket crashed.

Check the yield colum for the dividend each fund pays, and choose a fund marked "Inc"(income) not "Acc" (accumulation).

EdInvestor

Today's Observer has a useful article with advisers also preferring Equity Income funds to bond funds for those seeking income.Mention of property funds at the end with some suggestions - there should be more Property funds launched in the next few months to pick up the demand from ISA investors like your parents.

dunstonh

EdInvestor wrote:

Today's Observer has a useful article with advisers also preferring Equity Income funds to bond funds for those seeking income.Mention of property funds at the end with some suggestions - there should be more Property funds launched in the next few months to pick up the demand from ISA investors like your parents.

The article is referring to bonds within OEICS/UTs not life fund bonds.

Also, there is a little bit of using hindsight and past performance in the article which can always be risky.

nitwit_2

Thank you again for the input. Plenty to read up on now.

I may post again when they have the proposal from the IFA. I assume if Company / individual names and details are kept offline that would be OK?

Regards