My Grandma's £40k

duncanmac56

My Grandad died last month. My Grandma will get a widow's pension, but that will obviously be less than the full pension that they were living on before he died. She had a £40,000 fixed-rate bond with my Grandad which earned 4.35% interest gross p.a. which has just finished. She doesn't want to use the capital unless totally necessary, but wants the maximum income she can get. She is 89 and generally in good health.

She has asked me to help her find somewhere to put her money. My main thought is a Mini Cash ISA for £3,000 and the remaining £37,000 in a savings account (5.6% seems to be about the best). I don't think that she would want the hassle of a regular saver account.

Am I thinking along the right lines, or am I missing a really obvious type of investment? She is not averse to a little risk, but we can't gamble too much because she will need a steady source of income. I'd be really grateful for any suggestions.

ReportInvestor

I agree with the mini-Cash ISA.

Interest rates may be about to rise.

I'd be tempted to split the remaining money between a fixed rate account @ about 5.6% and a variable rate instant access account (that can also be used to feed further cash ISAs from April 6th 2007).

Splitting it this way gives your gran a decent rate now, but also some protection against the risk of medium term higher interest rates.

Another possibility is a shares ISA (up to £4K) that invests in corporate bonds. The income is also tax free. BUT make sure that you buy through a discount broker to reduce the initial charge - 5% initial charges can be expensive for 89 year olds if they don't live for more than 5 years. But no-one needs to pay them anyway .

Corporate bonds do carry some risk. Capital could be at risk if interest rates rose and/or the economy & companies faltered. I've also noticed that fund managers have not been averse to reducing income on them (probably in order to protect capital).

ReportInvestor

Top current fixed rates are

1Yr - West Brom BS - 5.64%
2&3Yr - Heritable Bank - 5.61%
4 Yr - Halifax 5.6
5 Yr - Halifax 5.58%

Newcastle BS have just opened a 5.35% variable rate over 50s account - although the longer term rate guarantees are poor compared to the Landsbanki account @ 5.2% that you can find out about elsewhere on the savings/investment forum.

With Landsbanki you know gran will get 0.25% above the base rate for 3 years. Not to be sniffed at.

duncanmac56

What sort of income can you get from a Corporate Bonds ISA?

ReportInvestor

It depends on the type of bond fund.

One that invests in "Junk bonds" would be much riskier because of the risk of default. Do you remember Parmalat (the Italian milk/food company that was hit by scandal)? My own mum's corporate bond fund had 2% in that and lost the lot .

Basically the higher the yield, the greater the risk to your capital.

UK unit trust corporat bond funds appear to yield about 3.5% to 5.5% (that's the effect of management charges for you ). Actually I only counted 4 that yield above 5%.

Perhaps mini-cash ISAs have their attractions given that your capital's safe.

duncanmac56

Perhaps a silly question, but why invest in corporate bonds if you can get a similar or better rate of return from a bank account? Is it the hope of capital growth?

ReportInvestor

It might be a rather good question. There would be capital growth if interest rates fell. It's probably more of a hedge against interest rates falling further.

Maybe also they have been oversold on the back of a run of good historic figures (they showed capital growth when interest rates fell )? Or maybe the opportunity to put them tax free in an ISA has resulted in them being overbought and oversold?

I could also have suggested PIBs (Building Society Permanent Interest Bearing Shares) which are also allowed into ISAs & can produce tax free income while there.

But their yield has also dropped to around 5.5%. Plus you have the purchase charges, and the bid/offer spread and the narrow market and the risk of capital loss if interest rates rise.

So, as interest rates do rise, many people are thinking cash ISAs rather than heading off to an IFA who can only scratch around for an ever dwindling source of income yielding assets (and don't forget charges have to be deducted as well).

A big problem that has forced down yields is the number of baby boomers looking around for retirement income.

These guys/gals have never been denied in their life, but they have depressed investment yields in the process.

P.S. I forgot to welcome you to the site, dm56 .