Best way to invest £250k

bobdauilda

for a monthly income please! I need some ideas for my pensioner parents who will rent a property long term with a rental price of approx 12k a year. Would like to cover this rental amount with the interest payments on the lump sum investment if possible and a little left over for hols etc. Dads pension is 25k a year plus old age pension and mums is just the basic old age pension. I thought it would be best to invest 60k in premium bonds and the remaining £190k in mums name to take advantage of her income tax allowance as dads would be pushed into the higher bracket of 40%. I would like some low risk and medium risk suggestions please if someone could be so kind? :beer:

EdInvestor

250k at a net 5% will give you 12.5k per annum so it's a reasonable target at the moment However interest rates can go down, and inflation will eat away at savings in the bank (while rents tend to rise with earnings over the long term) so it is wise that they put some of the capital in low-medium risk investments so as to keep pace.

How much risk are your parents willing to take?How much of the total would they want in high interest cash accounts or other no risk savings, for instance?

(Commercial) property funds are higher risk than cash but lower than equities.The most useful form of equity investment is "equity income" funds, which are lower risk than other types of stockmarket investments.

If they like the sound of a mix of cash, property funds and equity income funds, then the next step is to figure out how to split up the money between the three. Would they feel comfortable with say 150k 'safe" in cash or other, and 100k in risk investments? Or the other way round perhaps?

They should look at maxing out both their investment ISAs now, and again in April, that will account for 28k invested.They should transfer 14k of their investments into their ISAs every year thereafter, to maximise long term tax free income. I would suggest the ISA allowances are used for the property funds for now, as the income from equities is tax free for basic rate taxpayers anyway.

They should avoid investment bonds, which though beloved of many advisors (because of the commission),have very high charges,incur additional tax, and have hidden risks.

dunstonh

They should avoid investment bonds, which though beloved of many advisors (because of the commission),have very high charges,incur additional tax, and have hidden risks.

Please disregard that because it is complete and utter rubbish and has been proven to be many times on the forum.

Investment bonds can invest in the very same funds that Ed mentions in in her post at exactly the same charges. So, if its good enough to have them in an ISA and in Unit Trust form, then why no in investment bond form when its the same cost. Indeed, through a low cost adviser, investment bonds can be cheaper than unit trusts using the same funds.

Eds arguement is that you shouldnt buy a car because Ferraris cost £100,000 and that makes all cars expensive.

I thought it would be best to invest 60k in premium bonds

Waste of money and not reliable to provide an income.

and the remaining £190k in mums name to take advantage of her income tax allowance as dads would be pushed into the higher bracket of 40%

Interest probably wont beat inflation and if you draw the interest as income, then the capital will be ravished by inflation giving the effect of a stockmarket crash every 5 years. In ten years, that £190,000 would have the spending power of around £133,000

There are a number of better options available but they would include investment products and not savings products.

si1503

EdInvestor wrote:

250k at a net 5% will give you 12.5k per annum so it's a reasonable target at the moment

But if all the interest is drawn as income the real-term value of that investment and the income drawn from it is going to steadily decrease.

cheerfulcat

dunstonh wrote:

Investment bonds can invest in the very same funds that Ed mentions in in her post at exactly the same charges. So, if its good enough to have them in an ISA and in Unit Trust form, then why no in investment bond form when its the same cost.

Because 1) investment bonds tend to tie you in with exit fees for the first five years and 2) returns from investment bonds are taxed as income, not capital gains; as a result you can be pushed into the higher rate bracket on encashment without ever using your CGT exemption.

bobdauilda wrote:

I thought it would be best to invest 60k in premium bonds and the remaining £190k in mums name to take advantage of her income tax allowance as dads would be pushed into the higher bracket of 40%. I would like some low risk and medium risk suggestions please if someone could be so kind?

The premium bonds will not give a high enough nor a regular enough income for your parents' needs. Given that they already have a fair pension income, it would be worth considering equities for most of the capital, keeping perhaps 6 months' worth of expenditure in cash.

EdInvestor

si1503 wrote:

But if all the interest is drawn as income the real-term value of that investment and the income drawn from it is going to steadily decrease.

Quite so.As I said

However interest rates can go down, and inflation will eat away at savings in the bank (while rents tend to rise with earnings over the long term) so it is wise that they put some of the capital in low-medium risk investments so as to keep pace.

dunstonh

Because 1) investment bonds tend to tie you in with exit fees for the first five years and 2) returns from investment bonds are taxed as income, not capital gains; as a result you can be pushed into the higher rate bracket on encashment without ever using your CGT exemption.

1 - Investment bonds without exit fees are available as well as investment bonds with initial allocation rates which can be used to offset exit fees. So thats a non issue.

2 - investment bonds can also be more tax efficient in the right circumstances. i.e. not being assessed under means testing for benefits, including pension credit. No higher rate liability for a higher rate taxpayer who will be a basic rate taxpayer in the future, no reduction in age allowance if you are over 65 and earning more than £20,100. Can be used in estate planning to reduce IHT liability.

The product is not always suitable but that doesnt make it unsuitable all the time. When used correctly, it can be a very efficient product.

cheerfulcat

dunstonh wrote:

The product is not always suitable but that doesnt make it unsuitable all the time. When used correctly, it can be a very efficient product.

I have come to the conclusion that while investment bonds may actually be suitable for a very few people, they are constantly sold to the many. I can see some benefits but an awful lot of drawbacks and as someone who mis-bought one of these benighted things on the self-interested advice of an IFA ( and yes, he was independent ), I have seen most of them. I would urge you to think long and hard before defending investment bonds; most people IMHO are better off without them.

bobdauilda

cheerfulcat wrote:

Because 1) investment bonds tend to tie you in with exit fees for the first five years and 2) returns from investment bonds are taxed as income, not capital gains; as a result you can be pushed into the higher rate bracket on encashment without ever using your CGT exemption.




The premium bonds will not give a high enough nor a regular enough income for your parents' needs. Given that they already have a fair pension income, it would be worth considering equities for most of the capital, keeping perhaps 6 months' worth of expenditure in cash.

Thanks to all who have replied-looks like a minefield! They can manage quite nicely on Dads pension so really aren't adverse to medium risk investments so long as the monthly income can cover the rent and the initial capital investment is preserved against the deteriorating effects of inflation.
The premium bonds option that I suggested was because I read somewhere that with the max investment in them could bring an average return of 5% per year plus the added bonus of a chance to win the big one! Is this incorrect?

si1503

I'd look into splitting up the investment between cash, property funds, and equity income funds. The ratio of the split should be based on your/your parents attitude to risk, however all of these investments are on the lower-medium risk side of the scale, cash being the lowest risk, followed by property, and then equity income.

Perhaps opt to have the income from the equity funds withdrawn, if you put say 125k into equity income and managed to get an 10% return after taxes, thats £12.5k per year. Interest from the cash and property could then be left to culminate and offset the loss in value from inflation. Then you could spread this gain accross all 3 investments by rebalancing every couple of years.

dunstonh

I can see some benefits but an awful lot of drawbacks and as someone who mis-bought one of these benighted things on the self-interested advice of an IFA ( and yes, he was independent ), I have seen most of them.

With respect, the fact you got a bad one doesnt mean they all will be.

My own spread is around 20% going into investment bonds with the rest into Unit Trusts. Remember that I earn the same regardless of the tax wrapper due to NMA status. I have no reason to favour one over another.

They are oversold and I recently told a tied agent that I could crucify him if I wanted to because he was selling bonds to everyone and not using the ISA allowance, let alone the cases where UT were better. His response was that all the salesmen for his company sell bonds. The fault is with the people involved and not the product. Blame the people, not the product.

The premium bonds option that I suggested was because I read somewhere that with the max investment in them could bring an average return of 5% per year plus the added bonus of a chance to win the big one! Is this incorrect?

Yes it is incorrect. The average return is lower than that. NS&I currently have the average at 3.40%. Inflation is 3.9% so if you get average returns you are losing 0.5% a year.