£150,000 Investment - Investment Bond maybe?

Cannon_Fodder

I am considering a scenario, where I would have £150,000 to invest with my partner, in order to generate an income should we decide to semi-retire...

A casual recommendation, by an IFA my partner knows, "as something he often recommends for these scenarios", without going through fact-find and so on, was Scottish Equitable's Investment Bond.

Seems to have a range of reasonably well-known funds with respected fund managers, would benefit from the IFA's attention (after having had the fact-find etc...on risk preference etc) in re-balancing as necessary, seems to be tax-efficient and so on...

see http://www.aegonse.co.uk/consumer/investment/1001.htm

But...

It includes Life cover to payout on second death...Why? Some clever sidestep of IHT?
It would take some time to get £150,000 into Equity ISAs, so is this a practical "wrapper" instead?
Other alternatives?
Or start with this and shift over to Equity ISAs gradually - charges/tie-ins?
Is it too limited in Fund choices?

Ideal scenario would be 10%pa after charges, which seems realistic after viewing other posts about "sector averages including the crash", reinvest 3% to counteract inflation and live off 7% or so...not in the UK, if that makes a difference.

Before going through it all with the IFA, I'd like to have an idea of the important questions/issues to get clarification on...and some practical alternatives to get him to consider/justify and help me feel confident in his recommendation.

Not asking much, I know Thanks.

EdInvestor

....not in the UK, if that makes a difference.

Well, yes, it does rather. Where do you live? Whose tax laws are you under?

Cannon_Fodder

Sorry, made that as clear as mud by saying it like that...

Am currently in UK, paying tax, NI etc etc.

Would be looking at Greece, probably Crete...so an ex-pat sort of thing rather than complete different country tax treatment and all that confusion!!

sorry again...

dunstonh

Advance warning: this thread will no doubt turn into chaos.....

Scot Eq are coming out quite well on the low cost front but Clerical Medical are beating them at this moment in time and L&G though cofunds could give both of those a run for their money if a larger fund range is required.

it includes Life cover to payout on second death...Why?

It doesnt really contain life cover as such but invests funds which are contained within a life assurance tax wrapper. To qualify it has to have a tiny amount of life cover and often you see 1% extra allocation on death to meet that requirement.

Some clever sidestep of IHT?

The life investment tax wrapper is suitable for IHT planning.

It would take some time to get £150,000 into Equity ISAs, so is this a practical "wrapper" instead?

Ignoring IHT, Equity ISAs are better than investment bonds on the tax front.

Other alternatives?

Unit trusts/OEICs and/or investment trusts.

Or start with this and shift over to Equity ISAs gradually - charges/tie-ins?

A valid way to do it and one I use when appropriate.

Is it too limited in Fund choices?

There are some examples with limited fund ranges available but nowadays you can access unit trust funds within the investment bond and with fund supermarkets, that means you get virtually the same range as you see in ISAs and Unit Trusts.

Ideal scenario would be 10%pa after charges, which seems realistic after viewing other posts about "sector averages including the crash", reinvest 3% to counteract inflation and live off 7% or so...not in the UK, if that makes a difference.

Living off 7% is possible but I wouldn't want to rely on that. It would be more prudent to work on 5% net and then take each year as it comes. Remember that the averages means that some years you could get 15% and another year get -5%. You cannot work on 10% every year.

Bonds are generally more expensive than unit trusts but with larger investments, the charges come down and can actually end up with lower charges than unit trusts as they usually have tiered charging levels. If you can get the bond on new model basis arrangement, then this can really make it quite good value for money. Get a bad example and it can work out very expensive.

If you are a higher rate taxpayer, the bond can be more attractive as you can avoid higher rate tax if used correctly. Offshore versions are a little more expensive but that can be offset against the tax saved and work out better value in the long run.

edit: post made before above additions. Offshore is looking more likely than onshore.

EdInvestor

If you are a basic rate taxpayer you should avoid these bonds, which are subject to life assurance company tax and CGT.Basic rate taxpayers have no tax to pay on dividends these days, and an annual CGT allowance on realised gains of almost 9k.

So on a total of 150k you could invest direct and get around 4k income from the divis and another 9k from capital gains, tax free.:)

These bonds also have some of the highest charges in the business

Check here:

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

They can also be quite dangerous because they pay you "tax free income" by withdrawing the money from your capital.This means less and less is invested each year, so the high charges eat up more and more of your returns. If there is a bad year in the markets ,your capital starts depleting and can disappear rapidly.

We saw an example the other day here, where someone had got 6% income pa for 4 years but just his capital back after taxes and charges in the end - this over a period when the market rose by 45% and the overall market dibidend was 4% !

Highway robbery I call it.

dunstonh

These bonds also have some of the highest charges in the business

Ed, as per usual posts the FSA tables which only allow up to 25k as an investment amount. Investment bonds are not cost efficient at 25k and are not going to look attractive. 50k is when they start getting better and 100k plus when things improve even more.

They can also have very very low charges with a reduction in yield closer to 1% p.a. when purchased through the right distribution channels.

They can also be quite dangerous because they pay you "tax free income" by withdrawing the money from your capital.This means less and less is invested each year, so the high charges eat up more and more of your returns. If there is a bad year in the markets ,your capital starts depleting and can disappear rapidly.

It is not tax free income. Any withdrawals are treated as withdrawal of capital and that is why they do not exist for income tax purposes. A bit like going down the bank and drawing £200 out of the cashpoint. You dont have to declare that £200 as income and have it taxed again.

We saw an example the other day here, where someone had got 6% income pa for 4 years but just his capital back after taxes and charges in the end - this over a period when the market rose by 45% and the overall market dibidend was 4% !

That person had invested in a guaranteed equity bond linked to the FTSE100. You wont find many people on here who think that a GEB is a good product. However, that is a different beast to the one being discussed on this thread.

As per usual on these threads, the misinformation is starting early.

EdInvestor

so an ex-pat sort of thing rather than complete different country tax treatment and all that confusion!!

I think you'll find that if you move to another European country you will be subject to their tax rules.Some countries have useful tax rules which help foreign retirees. Cyprus for instance only charges 5% tax on pension income IIRC.

cheerfulcat

Cannon_Fodder wrote:

Ideal scenario would be 10%pa after charges, which seems realistic after viewing other posts about "sector averages including the crash", reinvest 3% to counteract inflation and live off 7% or so

This is not realistic. It certainly is possible to average 10%, even 25% p/a but to get that sort of return you have to take on extra risk; not everyone's cup of tea, especially in semi-retirement. You would be better assuming a return of 6%-7% and taking perhaps 4% as an income.

...not in the UK, if that makes a difference.

It makes a huge difference. The tax authorities in other countries may not have the slightly anomalous rules which allow the favourable tax treatment of investment bonds. I think that you should be looking for an advisor who specialises in ex-pat investing.

Gosh, didn't type fast enough...Ed,

They can also be quite dangerous because they pay you "tax free income" by withdrawing the money from your capital.This means less and less is invested each year, so the high charges eat up more and more of your returns. If there is a bad year in the markets ,your capital starts depleting and can disappear rapidly.

While generally speaking I agree that IBs are an expensive product, they are very suitable for some people; I don't think that it's fair to dismiss them all the time. Yes, the " income " is artificial; it comes from selling units. That doesn't of itself mean that there is "less and less invested" - there are fewer units but price of the units left should rise to cover the withdrawals + a bit. You're right about what happens when the market tanks, of course.

EdInvestor

Hi CC

What favourable treatment did you mean?

cheerfulcat

Hi, Ed,

The tax-free "income" and the fact that by top slicing gains you can avoid or at least reduce tax on them. This is what my accountant says, anyway...

Cannon_Fodder

Thanks - I think!!

Cost of product - would hope to get startup fees/commissions refunded by IFA, as partner worked for him.

Ed - when you say "invest direct" - do you mean buy specific shares, rather than into funds/trackers? So, say the 30 highest dividend payers, £5K into each, to get maybe 4-6% in dividends, then pray for the share price to move in the right direction, even if it doesn't, selling as many shares as I need for the desired income?

Doesn't that leave me exposed to equities?
No Property fund, Corporate Bonds, Gilts, whatever.

The Investment Bond says it allows 12 switches between funds per year free of charge, so re-balancing should be easy and cost effective...sounds like a good feature...

Or are you saying there are ways of getting dividends on funds? Including Property, Corporate Bond and Gilt funds etc?

In case it swings things, for info, I have pension currently aiming for £20Kpa, between State and Employers. Having done 22 years out of 44 for State, am guesstimating £10kpa (adjusting Employer expectations too, some is deferred and index linked) if I completely stopped working now, though the reality is more likely to be part-time working, trying to make contributions to Greek/NI if possible to get benefits and such like.