Monthly income from £140,000

EdInvestor

Gains within investment bond wrappers are taxed at 20% I believe, which means they are only suitable for high rate taxpayers. Basic rate taxpayers or nontax payers are not taxed on dividend income from investments ( one advanatage they have over cash interest, which is taxed) and capital gains tax would not be a problem as the allowance is high.

With 140k, the unnecessary tax payable in the bond would also quickly wipe out the extra from the pension credit.

And of course these bonds have very high charges.:(

We've discussed this issue of investing lump sums for income in a low risk way many times. This thread explains a reasonably straightfoward strategy, adjustable to suit the level of risk.

Beware of exit penalties in the small print when taking money out of investment bonds.

dunstonh

With 140k, the unnecessary tax payable in the bond would also quickly wipe out the extra from the pension credit.

The loss of pension credit is the equivalent of 1.10% on the return. She would be a basic rate taxpayer from the pension so the difference between unit trusts and investment bonds from a tax point of view would be very small. The unit trusts would be slightly better but not enough to come close to that 1.1% difference. The "extra" tax paid behind the scenes on a low risk portfolio investing would actually be very low compared unit trusts.

And of course these bonds have very high charges.:(

That is like saying that all savings accounts pay low interest because some pay 1%. It is irresponsible and inaccurate. You do not measure a product by the worst examples available. I havent arranged an investment bond with a reduction in yield more than 1.3% for as long as I can remember. And thats based on TER as well.

The thread you link to focuses on an investment strategy which is above the risk profile indicated by the OP.

Beware of exit penalties in the small print when taking money out of investment bonds.

There may be an exit penalty if it has been taken out in the last 5 years but the comment about small print is snide and again inaccurate. If it has been taken out in the last 5 years, it would be impossible not to miss it on the illustration and key features. You cannot resist being negative about everything.

wannasave_2

dunstonh wrote:

With certain investments not being included in the means test, it would make sense to utilise those.

could you give me an idea of what sort of investments aren't included in the means test please? (or a link to a page that might help explain it)
My ma is in a similar situation to the OP and neither of us knew that there were any savings that weren't included! TIA

dunstonh

Look at page 38 on http://www.thepensionservice.gov.uk/pdf/pensioncredit/pc10sapr05.pdf

Investment bonds invest in life funds and typically have between 0.1-1.0% life assurance (i.e. they pay 101% of the fund value on death).

The last few paragraphs on http://www.ifaonline.co.uk/public/showPage.html?page=190675

The following sites lays the information out in an easy to read manner http://www.irishsurvivors.com/support/welfareandsnt/

Here is the list given:

Capital that is disregarded

1. The surrender value of any life assurance policy or endowment policy or annuity;
2. business assets of a self employed earner whilst he continues in self employment;
3. the dwelling which is occupied as the claimants home;
4. all personal possessions such as jewellery, cars furniture etc;
5. the value of the right to an occupational pension;
6. personal injury damages held in a trust fund or a fund administered by the court;
7. the value of a personal pension;
8. social funds payments
9. most charitable lump sum payments
10. money deposited with a housing association by a tenant as a condition of occupying the home

On Eds comment on tax: The underlying fund suffers tax on investment income and capital gains under the special rate of corporate tax applicable to life assurance companies, which from 1st April 2003 was 20%. However the overall rate of tax on a well managed life assurance fund could be much lower than this at around 11% to 15%.

As a side issue, personal pensions are not included in the savings/investments list. I am not sure and havent been able to find out if they would be included if you were doing income drawdown. Technically, they shouldnt be but its one too look up when there is a quiet moment. Post A day rules may make pension contributions a valid option as well.

EdInvestor

Eds comment on tax: The underlying fund suffers tax on investment income and capital gains under the special rate of corporate tax applicable to life assurance companies, which from 1st April 2003 was 20%. However the overall rate of tax on a well managed life assurance fund could be much lower than this at around 11% to 15%

OK lets say the bond makes a return of 10%, that's 14,000 quid.

Tax @ 20% would be 2,800. Tax @ 15% would be 2,100.

According to dh if she got pension credit it would boost her income by 1497.60 a year which is less than the tax she would pay on her capital inside the bond.

And that's before we get to the charges.Check out the high charges that come with investment bonds here:

https://www.fsa.gov.uk/tables

I am afrain that dunstonh as a "New Model Advisor" with low charges cannot speak for the majority of advisors out there, who are still following the old ripoff model.

Sad but true

alrightfatbloke

Thanks very much for everyone's advice/help, it's much appreciated.

I've printed this thread off to show her and we'll have a chat with the chap from Barclays next week when she goes to meet him.

Just to clarify something here though if you don't mind, these bonds she has at the moment, will they effect her means test when it comes to her pension in 18 months time?

What I mean is will it be reflected upon as "cash in the bank" if you like, or will they see it some other way if it's tied up, in the way of the bonds I mean?

Thanks again folks and apologies for my ignorance on the whole thing!

brodev

dunstonh wrote:

With certain investments not being included in the means test, it would make sense to utilise those.

Can you give an example of one of these please? The ones you mention earlier are capital exeptions . Are there any that provide an income?

dunstonh

Can you give an example of one of these please? The ones you mention earlier are capital exeptions . Are there any that provide an income?

Item 1 on the list is the one being referred to. This would include most investment bonds investing into life funds. The vast marjority of which allow a monthly withdrawal to take place. They "tend" to not have a natural income as that is built into the price of the accumulation units (ie reinvested into the investment behind scenes). You then select x% pa. paid monthly as a withdrawal. So, if the investment is averaging 8% a year growth and you take 5% a year, you should see some capital growth on the value which can then be utilised in future years by giving a pay rise.

Just to clarify something here though if you don't mind, these bonds she has at the moment, will they effect her means test when it comes to her pension in 18 months time?

If they are investment bonds, then they will not be included in the means test. However, do note what Ed says. Whilst I do believe she overstates the points on charges by giving the impression all bonds are bad because some are sold with high charges, it is well known that Barclays products are at the expensive end of the range. Indeed, the IFA version of the same product that Barclays currently sell is significantly cheaper through IFAs. If the bond does end up costing more than £1500 a year extra in charges, then avoiding the loss of pension credit would be a waste of time.

It needs to be in a low cost bond, in low risk funds (to match her profile).

What I mean is will it be reflected upon as "cash in the bank" if you like, or will they see it some other way if it's tied up, in the way of the bonds I mean?

Technically, investment bonds are classed as life assurance which isnt included. Its using a bit of loop hole but there is nothing wrong with that.

EdInvestor

If the bond does end up costing more than £1500 a year extra in charges, then avoiding the loss of pension credit would be a waste of time.

It's not only the charges, it's the tax.

Investment bonds are the wrong products for this lady They are the right products for the advisor, of course (because of the charges).

Always remember the advisors' interests are not the same as your own.

dunstonh

Investment bonds are the wrong products for this lady They are the right products for the advisor, of course (because of the charges).

That is disgraceful Ed. You are totally incorrect on all accounts. You are not a financial adviser and it was only around 6 months ago that you posted that you didnt know much about life funds.

You continue to preach about how bad these are on the basis of measuring them by the most expensive examples. This is inconsistent with your other posts where you promote low cost distribution channels for ISAs and SIPPs as being but never mention these for this product.

As I have said before, you can get them with a reduction in yield of less than 1.3% with advice through the right channels and a little bit less without advice. That makes them cheaper than unit trusts and OEICs and if you couple that with the pension credit saved at the expense of a bit of capital gains tax behind the scenes , that can make it very worthwhile.

In reality, we dont know enough about the circumstances of the individual and its impossible to say one way or another. For you to come out with such clear cut advice on what she should do is totally wrong.