Monthly income from £140,000

EdInvestor

I should point out that my argument has been based on basic rate taxpayers throughout.As Dunstonh said in an earlier thread:

Unless you are a higher rate taxpayer or have concerns over your money being included for means testing for residential care in the future or require funds to be payable on first death to utilise nil rate band, you shouldnt be looking at an investment bond. ISAs should be fully utilised first and then unit trusts next. Whilst investment bonds do have their place they do tend to be oversold by low skilled advisers or commission hungry advisers as there can be a commission bias with bonds when the adviser goes full upfront commission....

But even a higher rate taxpayer will benefit, especially if the ISA use is maximised.

The HRT will have to pay 25% tax on the divis. So on a 100k investment if the divis were 5k a year, you would lose 1,250. But, I would suggest exercising your maxi ISA allowance, and filling it up with the top yielding shares first ( eg Lloyds bank and United Utlities, both yielding around 6.5%, then BT.A, etc) .In five years you would be able to cut that tax in half..The income can be replaced in the meantime by cashing in gains tax free.

Otherwise it's just the 50 quid a year for the capital gains trades, if wanted.Nil if the divi income is all that's required.

Did you really want an estimate at 6% growth?Even over the 5 years 2000- 2005 the HYP achieved double digit returns....:)

But on the basis of 1250 tax for the first 5 years and half that for the next five, using ISAs,as above, total deductions including tax would be 10,340, 90% is tax.

That compares with 24,146 with the bond.

And believe me, performance would be a lot better.

dunstonh

Did you really want an estimate at 6% growth?Even over the 5 years 2000- 2005 the HYP achieved double digit returns....:)

2000-2005, most of my comparable risk investment bonds doubled in value. Dont try and make out the good investment returns are limited to your HYP.

And believe me, performance would be a lot better.

Wrong. Over the years different sectors and sub-sectors will perform to different levels. In the 90s growth funds were king. In the early 2000s equity income was. Last couple of years its been back with the growth and more focused overseas than on the UK. Although that last bit is no surprise as the UK doesnt often come out as top performing sector over a year. Wheres next and how long will it be until UK equity income returns as a good performer.

You should also make clear when you present figures that you dont switch between net and gross in the same example to make certain figures look better than they really are. You should also point out that high yielding stocks tend to suffer with growth on the share price. LTSB is a good example of that.

LTSB have managed to maintain the dividend high despite the markets expecting it to drop. However, the share price has gone nowhere. So whislt the dividend looks attractive, a lower yield with better growth potential would pay better over the period of time.

LTSB isnt exactly an attractive high-yield blue chip right now.

jem16

EdInvestor wrote:

Did you really want an estimate at 6% growth?

6% was to provide a comparison on the bond figures. Nobody said that the bond would only achieve 6%

But on the basis of 1250 tax for the first 5 years and half that for the next five, using ISAs,as above, total deductions including tax would be 10,340, 90% is tax.

That compares with 24,146 with the bond.

You are assuming that you have worked out "actual charges" correctly which you have not. Actual charges are around 10k less unless of course the bond provider is lying?

And believe me, performance would be a lot better.

How can you possibly tell that?

Ed,

You seem to be confusing actual charges with the effect that those charges have on the growth.

To compare £24,146 with £10,346 is to compare effect with actual - not the same thing.

jem16

Ed,

Having sat down with my trusty pen, paper & calculator I have worked out a few interesting figures.

First of all to compare properly we can't change the goalposts. We can't get rid of some of the tax liabilities of the HYP by moving them into an ISA unless we also did the same for the bond. So let's keep both outwith.

Actual charges for bond - £15600 and not £24,146

HYP charges.

Despite quoting me £10,340 I worked it out at £17, 562 :eek:

The tax cannot possibly be the same in year 1 as year 10 as the investment would grow by the 6% I asked you to quote it on for comparison. In year 1, tax would be £1250 but in year 10, tax would be £2111. So the tax would be £16472 plus £640 initial cost and £450 trading costs.

ReportInvestor

jem16 wrote:

We can't get rid of some of the tax liabilities of the HYP by moving them into an ISA unless we also did the same for the bond. So let's keep both outwith.

Except the costs of moving money out of the bond into an ISA in the first five years would presumably be much higher?

I like the idea of the insurance industry producing more products with a 4% RIY for more people . They are about to tell the government that it is impossible to produce low cost pensions products below 0.6% RIY & fear the government is going to cave in ( remember a £100,000 pension pot is only going to buy around a £5K pension, so the investments concerned will be significant).

Re the RIY - I assume that this does not include hidden costs like portfolio turnover? Do you have the TER figures (Total Expense Ratio) for your fund(s), jem. And the portfolio turnover statistics as a % of the fund bought & sold last year?

EdInvestor

jem16 wrote:

The tax cannot possibly be the same in year 1 as year 10

It shouldn't vary by much.The tax is on the divis, which amount to 5% on the original purchase price. While you would expect divis on perhaps half the HYP shares to rise over the years,we are not talking by much, perhaps by inflation, say 5% a year for some. So say we have a share which pays a divi of 225 pounds a year, and it rises by 5%, that's an additional 11.25 pounds of which the tax would be 2.81. If this affects 10 of the shares, that's only an extra 28 pounds a year.

Illustration quotes over £5000 less but obviously you are correct and they are wrong.

It's quite easy to work out. Using a compound interest calculator (plenty on Google) work out the growth at 6% over the period.Then deduct the RIY and do the calculation again at the lower percentage figure ( 5.3% over 5 year, 5.6% over 10). The difference between the two figures is the charges.

ReportInvestors is right to mention the hidden charges the fund managers don't have to reveal.Some of these are not even in the TER, eg dealing charges.They can account for an extra 0.5% p.a and thus would be significant in this case.The fund managers get this money, not the IFA).

The above calculation produces "clean" figures, which would take these hidden charges into account, so that will account for a part of the discrepancy. There are no hidden charges with a direct investment portfolio.

jem16

EdInvestor wrote:

OK,the figures work out like this:

Looking at the quotes where they are increasing the allocation rate and using same RIY and 6% growth:

With 107,500 invested

192,516 with no charges
185,373 after charges

7143 charges paid
17,003 tax

Total deductions 24,146

Only just realised what you are doing here - must have been too half asleep last night

Only one little problem with your logic - I won't have invested £107,500, only £100,000.

If I use your figures this is the effect of being given the £7,500.

100k after 10 years at 6% = £179,085 with no charges.
107.5k after 10 years at 6% = £192,516 - £24,146(charges) = £168,370

Net difference £10,715.

jem16

ReportInvestor wrote:

Except the costs of moving money out of the bond into an ISA in the first five years would presumably be much higher?

No I could take out 7.5% of the original investment each year with no charge.

Re the RIY - I assume that this does not include hidden costs like portfolio turnover? Do you have the TER figures (Total Expense Ratio) for your fund(s), jem. And the portfolio turnover statistics as a % of the fund bought & sold last year?

Sorry - I don't think I have these figures but will look when I have time.

jem16

EdInvestor wrote:

It shouldn't vary by much.The tax is on the divis, which amount to 5% on the original purchase price.

Sorry my mistake. I was assuming divis were paid as a 5% percentage on whatever was in your fund as with normal divis.

So with a HYP it would cost £1125 per year in extra tax (It's an extra 22.5% for HRT as far as I'm aware), so £11250. Plus £640 initial cost and £450 trading costs. That's a total of £12,340 not including a possible extra £28 per year for increased divi tax.

Plus the advantages to me of the bond as well as advice.

toshkininny

So, is it clear in your head what your mother needs to do now, Alrightfatbloke?!