Investment Advice

hushpuppy

Hi can you please advise on the following?

My Mum has £100K that she would like to invest into a 'vehicle' of some sort, but needs the following:

1. Must have a guarantee of the money invested
2. Can be able to withdraw up to 5% of the principal investment per annum.

From the limited research I have done I have found a guaranteed 5 year 'cautious' Bond from Aviva, which allows 5% withdrawals per year.

Thanks

CLAPTON

the only guarenteed 'investments' that preserve the capital are savings accounts.

dunstonh

There are some investments that carry capital guarantees but typically gurantees cost money. This will either mean a higher charge or you will be restricted on how you can invest them.

From the limited research I have done I have found a guaranteed 5 year 'cautious' Bond from Aviva, which allows 5% withdrawals per year.

The cautious fund is not guaranteed though. Although there are a couple of guaranteed funds on the Aviva portfolio bond (I assume its that tax wrapper given the the info you have mentioned). At this time, the Aviva one isnt that well priced though compared to alternatives. Its not bad and certainly at the right end of the scale but its not what it was a few years ago.

2. Can be able to withdraw up to 5% of the principal investment per annum.

Whilst investments do typically have a long term average record of being able to achieve that, the lower the risk you take, the harder it becomes. You are effectively asking for a 6.25% gross return. If she wants to draw that level, then there is no nil risk option.

Why does your mum need capital security? In what events would she need capital security on some or all of the money? (reason i say that is you can get capital security on death at little or no cost, for example, if she is just concerned about a legacy)

hushpuppy

Hi Dunstonh,

The Aviva product I looked at is called Aviva Life With-Profit Guaranteed Fund or the Aviva Life Guaranteed Fund, which if I understand it correctly guarantees the initial sum invested, minus any withdrawals, for the term of the bond.

With regards to the 'income' she needs this each month, as this is the only savings she has so she needs the income from it to help towards living costs, but wants her money to be safe and (hopefully) make something from the investment.

May I ask therefore, if as you suggest Aviva are ok, is there better alternatives given her requirements?

dunstonh

The Aviva product I looked at is called Aviva Life With-Profit Guaranteed Fund or the Aviva Life Guaranteed Fund, which if I understand it correctly guarantees the initial sum invested, minus any withdrawals, for the term of the bond.

They are not the product. They are two of the hundred or so funds available within the different versions of the Aviva Portfolio bond. You have the guarantee level correct though.

With regards to the 'income' she needs this each month, as this is the only savings she has so she needs the income from it to help towards living costs, but wants her money to be safe and (hopefully) make something from the investment.

The Aviva product will do that but the funds in question are invested cautiously. The WP does have the potential to hit the 5% withdrawals but it may be worth mixing and matching some funds (maybe higher yielding funds) which dont have the guarantee with the ones that do. If the returns are not sufficient, the capital will drop and that is a risk in itself.

May I ask therefore, if as you suggest Aviva are ok, is there better alternatives given her requirements?

Possibly.

hushpuppy

Possibly.[/QUOTE]

Suggestions as to alternatives please????

jem16

hushpuppy wrote: »

Suggestions as to alternatives please????

You would really be best to see an IFA with your mum so that her exact requirements can be taken into account. Also with investment bonds (if that is best advice as the investment bond tax wrapper is not going to be the correct wrapper for many) there can be quite a difference in the terms offered as far as charges are concerned that taking out the investment with the right person can be crucial.

Is there a reason that you have looked at this "vehicle" as opposed to any other?

hushpuppy

Hi I did seek advice from a FA, who suggested this product, and I wanted to get a second opinion from board members.

I also don't understand the 'tax wrapper' issues you allude to. Can you explain please?

jem16

hushpuppy wrote: »

Hi I did seek advice from a FA, who suggested this product, and I wanted to get a second opinion from board members.

If that's an IFA who has done all the necessary factfinding he/she will know more about your mother's circumstances than we will. If it's an FA from a bank it may not be the best answer.

I also don't understand the 'tax wrapper' issues you allude to. Can you explain please?

Basically because of the charges and taxation with an investment bond it's not the most suitable wrapper for everyone. However there are occasions when it can be such as;

Avoidance of IHT
Avoidance of higher rate tax dividends
Not counted for care home fees - but can't be organsied with that in mind
the capital is not counted within means test for certain benefits although the income is
As the income is tax-free (because the withdrawals actually come from capital) it can keep someone under the age allowance (currently £22,900) for the higher personal tax allowance

If the bond is arranged on favourable terms there are times when it can work out just as good value as using the alternative unit trusts. Normally for this to be the case your mother would invest £100k but the initail allocation would be more than that - this happens when the IFA takes a fee less than the commission offered on the product and that commission is then rebated back into the product. So initial allocation could be £107k which therefore offsets the higher charges during the first 5 years.

If it was a bank's FA doing this bond the commission would not be rebated and initial allocation would be lower and therefore charges would be higher.

I'm sure dunstonh will add on anything I've missed.

The advice you have been given, if it's from an IFA, may well be spot on for what your mother requires.

dunstonh

Jem covered virtually all of it.

It is important to make sure its an IFA and not an FA. For example, Norwich & Peterborough B/S are really prone to overselling this product for relatively small values and without maximising the ISA allowances first. I have put in a number of mis-sale complaints against them and its always an Aviva bond that is used (as it would be given their link). Even my Aviva rep has admitted that they have problems with the banks and building societies on that front.

The product itself is fine. A few years ago it was the most competitively priced bond. However, Aviva have made it less attractive and others now offer lower charges (or partly they have become cheaper). The market is always fluid like that and the best options change.

I also don't understand the 'tax wrapper' issues you allude to. Can you explain please?

again, Jem has covered some points on this. When you invest you not only have where you invest (i.e. the investment funds) but also the tax wrapper you want to put the investments into. The main consumer tax wrappers are pension, ISA, onshore bond and offshore bond. You can also hold investments unwrapped in unit trust/OEIC form. Offshore bond is typically for very large investments and is actually not as attractive as it used to be or you have to fit a narrow criteria for it to be best. ISA and Pension are the two most tax efficient options. Unwrapped unit trusts usually come next unless you are a higher rate taxpayer and/or you are investing a large amount of money. In which case investment bonds come into play. Income within investment bonds is largely taxed the same way as unit trusts but growth is subject to tax in the bond. Whereas unit trust isnt until you get above your annual CGT allowance.

I am actually going to stop there as explaining the differences would take another 40 or 50 lines and go too in depth for what you need to know. However, an IFA should do a cost/tax comparison between the unit trust and investment bond options to see which is most efficient. An FA is unlikely to as their limited product range is often structured that the differences are marginal or their employer is happy to take a hit on complaints given the small number of people that are likely to complain. To be sure, you should ask if a cost/tax comparison has been made between unit trusts and the investment bond. If so, can you see it.