£150,000 Investment - Investment Bond maybe?

EdInvestor

dunstonh wrote:

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.

Actually the bond in question would appear to be.....

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wait for it

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an endowment

Check it out

Tiggs_2

EdInvestor wrote:

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.

some interesting points...

They dont pay a tax free income. Withdrawals are a return of capital.
Less and less invested each year depends on withdrawals and charges exceeding growth....not whether you are taking withdrawals in the first place.
The charges are only high if you let them be - i set up many bonds with a RIY of less than 1% over 10 years...very cheap IMO.
A drop in the market will cause any investment to drop, a bond is no different (assuming its invested in the market in the first place - of course you could make a free switch to a non-market based fund at that time)

The "danger" is that if you take 5% and growth is 4% you loose 1% from your capital.....in contrast is needing 5% and only getting 4% because thats your income from dividens. Many people will take flexibility in the capital for stability in their monthly drawings...for many to not do so would be...."dangerous".

dunstonh

Original GEBs were single premium endowments. You couldnt get them in Unit trust or ISA form. However, you shouldnt compare them to regular premium endowments. If that is indeed, the product mentioned on the other thread, then it certainly shouldnt be compared to the one being looked at here.

EdInvestor

Hi CF

Cannon_Fodder wrote:

Ed - when you say "invest direct" - do you mean buy specific shares, rather than into funds/trackers?

Not necessarily, I mean outside the bond, directly into the UTs/shares whatever

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?

You may like to look at the High Yield Portfolio idea, very suitable for oldies IMHO as it has a number of protective risk reduction filters built in ( see criteria for choosing shares).I would buy around 20-25 shares for the amount you have.

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

You can always use part of your money to invst in other asset classes as well. The offshore commercial property ITs run by the big insurers pay decent dividends and may be of interest.I am not convinced the extra risks of bonds/gilts make them worth holding over plain old cash at current rates.

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.

Strongly advise you max out ISA allowance for you and spouse in next few years to cut taxable (pension-type) income as you are bumping up against the level at which your age allowance will be cut.Dividends are tax paid for people on basic rate but they will affect the age allowance, so put the investments paying the highest divis in the ISA first.

Cannon_Fodder

Oh, ok. Misunderstood "direct". Quite like the HYP idea...will have to read up.

This won't all happen before next tax year starts, so when I/we put £14K into ISA whats the best route for £136,000 until the following tax year?

In time, if I have a spread of Stocks and Shares ISAs, including other classes for diversification of risk etc...with Cofunds or somesuch...

...when a crash happens to one or other funds, or its time to re-balance, then that's going to incur fees, presumably...just at a time when I might be down a few % as a correction turned into a downturn...

It feels like an "all-in-one" product that you can move between sectors without cost, whether re-balancing or avoiding a crash, has something going for it...

Or am I missing something about ISA wrappers, do they also allow switching between funds/sectors without costs? Or some other product that has some tax efficiency?

If I'm reading it rightly, I think the Inv Bond allows 5% drawdown tax free, which may be a sensible maximum income anyway...

However, does a Bond lock money in? In 10 years when ISA allowances have shot up, or some other boon in the market, can the Bond be cheaply shutdown? Or if performance is astounding I feel comfortable about taking more income out, can I?

sorry for more questions...!

dunstonh

do they also allow switching between funds/sectors without costs?

They allow switching. Some dont charge, others do. The charge is usually no more than 0.25% though.

If I'm reading it rightly, I think the Inv Bond allows 5% drawdown tax free, which may be a sensible maximum income anyway..

That is not correct. It is 4% withdrawal of capital with no immediate tax liability. If basic rate taxpayer, then it has no impact on your tax situation.

However, does a Bond lock money in?

A bond is just a tax wrapper in the same way an ISA is. You can invest in exactly the same unit trusts that are available unwrapped or wrapped in an ISA and can have a bond with no tie in period.

in 10 years when ISA allowances have shot up, or some other boon in the market, can the Bond be cheaply shutdown?

Those that do have a timescale tie in, normally only do it for 5 years and its a reducing penalty in that period. After that, there is no penalty. If you are concerned about a tie in, then pick a provider that doesnt have one.

Or if performance is astounding I feel comfortable about taking more income out, can I?

Yes you can.

EdInvestor

A bond is just a tax wrapper in the same way an ISA is.

You'd think the investment returns in it were tax free, wouldn't you the way he puts it?

Wrong.You would pay life company corporation tax (20%) and CGT on your returns within the bond, neither of which you would pay at all if you invested directly in the shares or funds with no tax wrapper, not even an ISA.

Always remember that trading incurs charges which means you lose money. You need to keep your fingers off that mouse!

Look first to set up your divi income,which is paid in for free and is also tax free for BRTs.Top up once a year only (if necessary) to increase income using your CGT allowance.

It goes without saying one should avoid spending capital itself as happens with the bond.

dunstonh

You'd think the investment returns in it were tax free, wouldn't you the way he puts it?

Only you would.

Always remember that trading incurs charges which means you lose money. You need to keep your fingers off that mouse!

Except it doesnt incur charges with most providers.

It goes without saying one should avoid spending capital itself as happens with the bond.

Why? If something grows 10% and you draw 5% then you still have a gain and as it is withdrawal of capital, it has no impact on your income tax, age allowance or means tested benefits.

Tiggs_2

EdInvestor wrote:

It goes without saying one should avoid spending capital itself as happens with the bond.

When you empty the bath do you worry that only one end drains away?

EdInvestor

Always remember that trading incurs charges which means you lose money.

Except it doesnt incur charges with most providers.

Oh yes it does. Dealing fees, stamp duty etc are charged to the investor, and shockingly the FSA does not require these implicit charges to be revealed.

They add 1% on average to charges on top of the TER.In some cases where there is very high portfolio turnover (churning) - you see it in foreigfn funds more often - the charges add 2 or even 3% to the TER.