£150,000 Investment - Investment Bond maybe?

nrsql

Would it be possible to set one of these up so it paid out say 50% of growth?

In that way you would never be eating into capital (ignoring inflation) and would get a variable income - but periods of no income.

Trying to think of a situation when someone would want this - certainly not if they were trying to live off it.

>> They are also not included in the means test for local authority care.
Take it that doesn't mean you can sell your house buy a bond and get free care (they would never have missed that).

Anyone else enjoy the dun-ed sidetracks? Maybe they should all be gathered into a new forum as they contain a lot of info. Long may they continue.

Chrismaths

Ok, I'll try and summarise the different tax treatments of the wrappers, and what withdrawing "capital" really means in investment terms.

Onshore investment bonds

Investment bonds pay tax at 20% on interest (same as basic rate income tax).
If an asset is not liable to CGT (such as a gilt, or a corporate bond), then it is not liable to CGT in a bond.

Dividends from are taxed at 10%, which is satisfied by the dividend tax credit for UK companies (same as for a basic rate taxpayer)

The key difference is if an asset is liable to CGT (such as a share or property) then every year the bond pays 20% of the notional gain (so you don't get an extra CGT exemption). However, the insurance company can offset losses against gains. What effect this extra tax has on the investment is dependent on how much of the bond is invested in equities, so it can't be easily quantified. I've done an example before (I think I emailed it to Dh!) but I've lost it.

You can withdraw up to 5% of your original premium per year without any immediate liability to tax, and unused allowance roll over indefinitely. Withdrawals in excess of this are usually best done as a surrender of part of the bond (rather than a withdrawal from it). The gain on this part of the bond is the value of the surrender less the premium (on this part of the bond) and a proportional amount of withdrawals.

A basic rate taxpayer will have no further liability to tax on this gain, a HR taxpayer will have to pay an additional 20% of the net gain. On the borderline it gets more complex, so I'll leave that for now (it's called top-slicing if you are interested).

Offshore bonds

These pay no tax in the bond, apart for from unreclaimable foreign withholding taxes (such as UK dividend tax credits).

You get the same 5% allowances as for onshore versions.

On surrender of part or all of the bond, as no tax has been paid, a basic rate taxpayer has to pay tax at 20% (IIRC - might be 22%), and a HR has to pay 40%. A non-taxpayer has no liability. Again, top-slicing comes into effect.

Investment Effects of Withdrawals - "capital" or "income"

If you take a fixed £ amount from any investment (it doesn't matter if it's a bond, UT, OEIC or share - the effect is the same), volatility (swings in value) have an effect on your investment. This is because if your investment falls, you have to "sell" proportionally more of the investment at a depressed price. So basically you sell more when things are cheap, and sell less when things are comparitively dear. This is the opposite of "pound cost averaging".

The simplest way to counteract this is to not take a fixed £ amount - If you take (for example) the lesser of 5% of the premium or your investment growth in that year - you will not as badly get stung in bad times.

However, this ignores the fact that some people need a fixed level of income to live off, and can't afford to subsidise the lean times. But this applies equally, irrespective of the tax wrapper - the only other way to mitigate this risk is to select investments that demonstrate a low level of volatility - but this will also reduce your potential upside. You have to strike a balance.

Income and Capital are artificial terms in this context - once income has been paid to you (or your bond), it is capital.

Cannon_Fodder

Yeah, thinking it through in the traffic on the way home, I thought DOH....
if instead of IB, I went direct and got 100 Barclays Shares took dividend as income, and occasionally sold a couple of shares to top off my income, then in time my "units" (shares) disappear anyway, its the same irrespective of wrapper, which is what I thought when I started but had a little brain-dead moment this afternoon.
Thanks again.

Chrismaths

I think it ought to be noted that I'm not commenting on the suitablility of the wrapper for you - I don't know your circumstances.

I'm an investment manager, so if you came to me, I'd find out more about exactly you wanted from the money, your attitude to risk, and your tax position (now and in the future). Depending on your CGT position (and what ISAs /PEPs etc you already have), it's unlikely I'd recommend an Investment bond - unless you were looking to do some Inheritance tax planning.

I manage money to get the best after tax, after charges returns I can within the risk tolerance of my clients - Tax wrappers are aids to this, not products to be sold.

The trouble with Ed is that occasionally I actually agree with her sentiments - such as that Investment bonds are oversold by low-skilled, and commission hungry salesmen. However, it's not the tax wrapper's fault, it's the charging structure. Once you take the low-skilled or commission hungry adviser out of the equation and deal with someone either on an NMA basis, or someone like me who makes no money from wrappers, they are useful tools for many people. No tax wrapper (not even an ISA or none!) is a panacea, you have to get the right combination for the right circumstances for the right person. Ed spreads misinformation about anything to do with financial services - I sometimes wonder if she was married to an financial adviser once...;)

dunstonh

Well, at least you understand it now and that is a big plus.

edit: I also agree with Chris in that Ed is often correct on many points but then blows it by using the information out of context. Also, when there are areas which could result in different options being considered, she will try and use the same product/option every time because of a misplaced bias against it. A product that is right 5% of the time should be used that 5%. Just because it is wrong 95% of the time, doesnt mean that the other 5% should not utilise it.

I have stated before that my investment split is around 20% on investment bonds. Its a solution that fits some and not others. However, as an NMA IFA (which also means there is no commission bias) the discounting means that the commission rebated back into the plan can make the investment bond cheaper than the unit trusts you typically would compare them against. This can be compared by looking at the reduction in yield over 10 years (or 20 in some cases as some providers have complicated charging structures to make theirs look better in a 10 year period).

If you were to assume full commission taken on unit trust or onshore investment bond, then ignoring IHT and other advantages of the investment bond, the unit trusts would come out as the better option in most cases.

So, when Ed writes off the product as being expensive, it is very similar to saying that as Ferrari's are expensive, all cars are and you shouldnt have one.

nrsql

(guess the op as got what he wants from the thread).

>> within the risk tolerance of my clients
This has always confused me.
How do you assess how risky a customer wants a portfolio to be?
I'm pretty sure I would come out as medium because I wouldn't know how to answer to any pertinent questions.

cheerfulcat

Cannon_Fodder wrote:

Yeah, thinking it through in the traffic on the way home, I thought DOH....
if instead of IB, I went direct and got 100 Barclays Shares took dividend as income, and occasionally sold a couple of shares to top off my income, then in time my "units" (shares) disappear anyway, its the same irrespective of wrapper, which is what I thought when I started but had a little brain-dead moment this afternoon.
Thanks again.

Yes, but with directly held shares ( or collective investments ) you normally just take the dividend; you don't sell shares/units. With the IB you don't have that choice.

Chrismaths wrote:

If you take a fixed £ amount from any investment (it doesn't matter if it's a bond, UT, OEIC or share - the effect is the same), volatility (swings in value) have an effect on your investment. This is because if your investment falls, you have to "sell" proportionally more of the investment at a depressed price. So basically you sell more when things are cheap, and sell less when things are comparitively dear. This is the opposite of "pound cost averaging".

To me this shows the fundamental difference in thinking between the financial industry and investors. A normal investor in shares looking for income would not consider selling them unless this was part of an overall strategy to reduce capital. The income comes from dividends, not sales.

dunstonh

How do you assess how risky a customer wants a portfolio to be?
I'm pretty sure I would come out as medium because I wouldn't know how to answer to any pertinent questions.

I have two questionnaires. One of 40 questions which I dont use much (it repeats the same questions in different wording to see if your responses are consistent) and another of 9 questions. The questions tend to focus on different scenarios and what actions you would take in those scenarios. How you answer the questions (multiple choice) indicates what your risk profile is.

There is no right or wrong answer to the questions on a personal level. An experienced investor may turn round and tell you that you should be investing when there is a stockmarket crash to benefit from buying lower and you shouldnt be selling. However, what if you can only tolerate a certain level of loss before it impacts on your financial planning or even your financial security? You may have to sell even if its the wrong time. In which case, your portfolio should be built so its unlikely to put you in that position.

To me this shows the fundamental difference in thinking between the financial industry and investors. A normal investor in shares looking for income would not consider selling them unless this was part of an overall strategy to reduce capital. The income comes from dividends, not sales.

Nothing wrong with doing it that way but it may not be the most tax efficient and it may not generate enough income to meet requirements. Utilising some of the growth to supplement income is fine. A share with a high yield now may not remain that way. If its too high then it could reduce the growth potential of that share which could impact over the years.

If we are talking about accumulation units, we have to remember that the income generated from that holding is reflected within the unit price.

In simple terms, it really doesnt matter if you have £100 paid out to you directly or have £100 paid back into the investment which you then draw out after. You have still had £100.

cheerfulcat

A share with a high yield now may not remain that way. If its too high then it could reduce the growth potential of that share which could impact over the years.

I'm sorry, dh, this makes no sense. The yield will fall for one of two reasons - a dividend cut, which is a risk you allow for, or a rise in price, in which case so what? The amount is still the same, it's just the percentage that has changed. As to growth potential, it doesn't matter if you are investing for income as what matters is the dividend payout, not the capital growth. In any case I don't see how you come to the conclusion that a " too high " yield impacts on growth? High yielders are generally ex-growth already...

nrsql

Think this is the situation where the dividend is kept high to the detriment of the company and eventually causes problems.