£150,000 Investment - Investment Bond maybe?

Tiggs_2

the tax the bonds pay is the tax subjected to the fund managers and does not relate to you as an individual.

its DEEMED to be enough tax paid that you dont have to pay basic rate tax yourself on the plan. as such there is no CGT ever paid by you and only income tax paid if you make a gain that puts you into higher rate tax (or you already pay HRT)...then you pay 20% extra on that gain.

the growth on the plan will come back to you if you exceed the amount you invested in withdrawals (or exceed the amount that HMRC allow you to deem to be capital each year) ....as then you must be spending growth - they assume! At that time its simply taxed as a gain on the plan and you pay personal tax (or not) based on the description i gave above.

thats a rather simple explanation...but its near enough.

cheerfulcat

Cannon_Fodder wrote:

"withdrawls come from capital"

so, the investment returns just sit there, never available? Of course not, but what/where/when do they do/go...???

Hi, Cannon Fodder,

You make the withdrawals by selling units in the underlying fund(s)and hope that the value of the remaining units rises to cover the amount of the withdrawals and give a decent return on top, when you come to sell them.

Tiggs_2

in reality it doesnt matter - its like taking water out of one end of the bath and filling up the other with more water....you still have more water in the bath!

the distiction between capital and growth is more relevant to the tax man as its they who decided if a withdrawal is gain or not and thats not linked to growth - in fact, you could (if your adviser was an idiot) pay tax on a withdrawal even though your bond had LOST money.

dunstonh

If you disregard everything Ed says in this thread, then you will have a better understanding.

The tax difference between unit trust and bonds is not that great and a theoretical maximum is often quoted rather than a real life figure which can be lower. However, that depends on the type of investment and what sort of taxation the fund manager is liable to you within the fund.

Investment bonds do have other advantages. You can have offshore versions which can benefit from gross rollup and provide potentially better returns over the long term. The benefit of that has to be offset against the right contract as offshore bonds are more expensive than onshore.

If your retirement income is going to be quite low in retirement and would see you in receipt of pension credits if it wasnt for your investments and savings, then investment bonds are handy there because they are not included in the pension credit means test. They are also not included in the means test for local authority care. If your income at age 65, is near £20,100 then there too investment bonds can be useful as providing you do not draw out more than 5% per annum, it doesnt go on our income and reduce your age allowance.

All these points on investment bonds have to apply before they happen. i.e. you cannot invest it at age 66 and then hope to get pension credit. The investment has to already exist and be in place as an investment.

Shame my M&S High Income wasn't up to scratch with Invesco... ;-( - now the judgement call will be, is it worth switching at the moment, or has Invesco done a bit TOO well for a couple of years, and a correction is near at hand...

You are not comparing like for like. Invesco Perpetual Income is medium risk UK Equity Income fund. M&S High Income fund is a low/medium UK Other bond fund.

With your requirements, I would want a UK Other bond fund in the overall portfolio of 15 funds or so. Over 5 years, the M&S fund is well placed (coming out 7th in it's sector). Although I would pick the Invesco Perpetual monthly income plus fund or artemis high income ahead of it anyday (and have done for many years)

These funds are only examples and not advice. The funds are available in Unit Trust/OEICs, ISAs, Investment Bonds (onshore and offshore), SIPPS and personal pensions. This is one the areas where Ed has confused you unnecessarily. Where you invest (i.e. the range of funds) is one thing. The tax wrappers used are another.

On the withdrawal of capital front, think of it like going to the cashpoint once a month and drawing out £500. As long as £500 has gone into the account that month, then you are not going to see the value drop. You dont get taxed on that cashpoint withdrawal because the tax has already been dealt with at source. If one month the value goes up by £1000 and you draw £500, then your value will be £500 higher. If it goes up by £300 and you draw £500, then the value will drop by £200. That is no different on any investment product where you take a fixed regular wtihdrawal from it.

Cannon_Fodder

Ah! Mmmmm...

So I get 100 units of something at £1000 each, for ease of maths...
sell 5 units for my income, take £5k out income, leaves 95 units...
10% performance gain, makes £1100 per unit,
if I sell 5 the next year, my income would be £5.5K, so I could take out perhaps 4.5 units instead, reinvest 0.5...
repeats with different performance until...
Somewhere down the line, say 15 years, I will only have (perhaps) 30 units left...so is that where Ed is right, in that a crash not only reduces the unit price, but having been taking the units out means there less units to multiply it by..........mmmmm
Of course, after 15 years, HOPEFULLY, the unit price with be double, say £2000, but by then inflation means I probably do need £8k, so another 4 units taken out...down to 26....and so on...
Or are the types of funds going to be Acc so "automatically" refreshing my units?
You get the idea, I'm getting lost now, I trust!
sorry...

cheerfulcat

Tiggs wrote:

in reality it doesnt matter - its like taking water out of one end of the bath and filling up the other with more water....you still have more water in the bath!

Of course it matters. If the value of the units goes down you need to sell more of them for the same " income ". In a period of poor stock market performance it would become a vicious spiral. IBs have their place but it is nonsense to imply that this is a safe way of providing a regular income.

Cannon_Fodder

Crossed with your's dunstonh... Going to lie down this evening and try to come back tomorrow with my brain switched on.

Thanks for persevering.

Cannon_Fodder

CC, thanks.

So using my maths again...
There could be a -20% crash, what had been looking at double, is suddenly £1600, so to get £8k (my inflation figure) needs 5 not 4 units...rebalancing hopefully stops the crash persisting...but that unit is gone for good...

MMMmmmmmm.

Tiggs_2

cheerfulcat wrote:

Of course it matters. If the value of the units goes down you need to sell more of them for the same " income ". In a period of poor stock market performance it would become a vicious spiral. IBs have their place but it is nonsense to imply that this is a safe way of providing a regular income.

But that is no different to any investemnt where a fixed regular income is required from an underlying fund subject to rise and falls.

If a client wants to lower their withdrawal at times of poor market returns they are able to - or they can stick to their fixed level.

"In a period of poor stock market performance it would become a vicious spiral."

If you are using dividen income for income and that falls you either put up with a falling income or sell capital.....for many people the fixed income is more important than the capital falling - and for those that arent in that position- they simply lower their withdrawal.

dunstonh

Somewhere down the line, say 15 years, I will only have (perhaps) 30 units left...so is that where Ed is right, in that a crash not only reduces the unit price, but having been taking the units out means there less units to multiply it by..........mmmmm

doesnt happen like that though and as the unit prices go up, less units need to be encashed to meet the required figure. So the number of units being encashed over time will reduce.

12x1 = 12
6x2 = 12
4x3 =12
3x4 =12
2x6=12
1x12=12
0.5x24=12 etc etc etc (the units dont stop on whole figures they can end up 0.001 if required).

For some unknown reason that concerns you then you dont have to take a fixed regular withdrawal and can utilise natural income. Again that is possible on all the tax wrappers, including investment bond.

To give a real example and using Inv Perp income, £25k was invested in that in August (as part of larger portfolio of 150k utilising ISAs, UTs and inv bond but 120k was in the inv bond) and that currently has 18,509.32 units. It has a 5% withdrawal p.a. in place and it had 79 units taken out from the 18,509 last month. The value is of the investment has gone up in the last 30 days by 2% so to meet that 5% withdrawal less units will be surrendered. Probably around 76 this month.

They invested £120k on 24th August, its currently worth £127,254 and is paying out an annual equivalent of 5% p.a on a monthly basis.