Best way to invest £250k

cheerfulcat

bobdauilda wrote:

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's incorrect.

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.

On a capital sum of £250,000, a reasonable rate of interest ( 4% after BR tax ) or dividends ( a riskier 5% ) will bring in between £10,000 and £12,500 per annum. Investing in equities should give an above inflation return over that; cash won't.

dunstonh wrote:

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

And with respect to you, dh, I got nearly a dozen of the blackguards...more than coincidence, surely? Or are all of the bad IFAs in the country local to me? And I am blaming the people; but I am also saying that the product is unsuitable for most investors. EDIT: Or do you mean " bad one " investment bond? In which case I can only say that it seems to have been a perfectly standard issue one.

missile

bobdauilda wrote:

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?

No that is not correct. I suggest you read Martin's article on the return from premium bonds.

http://www.moneysavingexpert.com/cgi-bin/viewnews.cgi?newsid1161700153,9594,

EdInvestor

if you put say 125k into equity income and managed to get an 10% return after taxes...

There should be no taxes to pay if the investments are put in Mum's name.Dividend income will be tax free, and that should be 3-4%.Plus 9k can be earned in capital gains if she sells shares/funds for income, before any tax is payable.

dunstonh

And with respect to you, dh, I got nearly a dozen of the blackguards...more than coincidence, surely?

I cant say. I know two that are a disgrace and give bad advice on the basis exactly as you say. A know quite a few others that are really just mortgage advisers in disguise and do the occassional investment case. Their investment knowledge is weak (although good on mortgages). Most I know though are of a very high standard and would trust without doubt. Although to be fair, I tend to be in contact with the directors/partner/owners rather than the "employee" advisers and in general, you expect a higher standard at that level.

With regards to the product though, it is now possible with the investment bond to invest in unit trusts with UT annual manangement charges and no strange charging styles. In effect, the investment bond is just the tax wrapper in the same way you can put unit trusts inside the ISA and pension tax wrappers.

So, if the charges are the same, then its just a case of using the most appropriate tax wrapper. Whether that be Unit Trust, ISA, SIPP or Investment Bond.

Chrismaths

And with respect to you, dh, I got nearly a dozen of the blackguards...more than coincidence, surely? Or are all of the bad IFAs in the country local to me? And I am blaming the people; but I am also saying that the product is unsuitable for most investors.

The charge that investment bonds are oversold by IFAs is absolutely true - Like you say, the are unsuitable for the vast majority of investors.

However, dh always ends up on the wrong side of a kicking in these threads because he responds to comments from Ed such as

EdInvestor wrote:

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.

When you're a pro, such as dh or me, when you see a comment like that, you feel duty bound to correct the inaccuracies (such as expensive, hidden risks etc), and point out that without knowing the client, you can't make such a sweeping assessment. They are still valid products for a small number of people and situations - although I'd probably argue more like 1 in 25 than 1 in 5 - but I suppose that depends on who your clients are. That inevitably puts you on the other side of the argument, even though you might agree that far too many bonds are sold, and degenerates into another one of these boring and repetitive threads. If Ed would just adjust her language to say, "Be careful of investment bonds - they are often unsuitable, and if you are recommended one, check the commissions paid to the adviser very carefully, and then in all likelihood run for the hills" or some such, I don't think either me or Dh would have any argument against that.

Are there bad IFAs who recommend products based on commission? Undoubtedly. Why is this? Probably because a great number of IFAs are ex-insurance company salesmen, or bancassurers and therefore salesmen rather than service providers.

This doesn't mean that IFAs are bad, it means that bad IFAs are bad - there are also plenty of good ones out there. If you can find a good one, they are very useful. The "New Model" - of Dh's NMA fame - is a good start, the advisers who have adopted it tend to be of a higher quality (but not necessarily), and there are still good "old model" advisers around, but picking a NMA increases your chances of finding a decent IFA.

I say it's a good start, but it's not a panacea. They are still paid by product providers rather than by the client, so are limited to providing products that pay a "trail" or servicing commission. That means that even an NMA is effectively limited (in investment terms) to Unit trusts and OEICs, and are unlikely to recommend Investment trusts, shares, ETFs or institutional products. But that's not too much of a limitation, there is still plenty to choose from, although it means that there is a bias towards actively managed funds over passive, as there are more of these. But then I would say that, I'm an investment manager

dunstonh

although I'd probably argue more like 1 in 25 than 1 in 5 - but I suppose that depends on who your clients are.

I have a rather large number of higher rate taxpayers in their 50s who are going to be basic rate taxpayers in retirement. The retirement income is often close to the age allowance amount. These are the prime candidates to where the investment bond is best advice.

Also, on NMA basis, the higher commission means greater rebate. Coupled with the special offers the providers run periodically increasing allocation, that can make the charge lower than UTs. You can only get away with doing that with a small number of providers who are truely low cost. It wouldnt work with the expensive versions.

That means that even an NMA is effectively limited (in investment terms) to Unit trusts and OEICs, and are unlikely to recommend Investment trusts, shares, ETFs or institutional products.

The control functions for financial advisers usually stop IFAs from recommending a number of those products anyway as they are not classed as packaged products. That limits us to packaged ITs. That said, UT/OEICs are becoming more dominant all the time. The industry should consider moves with the FSA to move to a single investment fund class removing insured funds and pension funds leaving unit trust/oeic funds as the main class. Then the wrappers can be just that. Wrapper only with no charges on it leaving the charges to the funds.

EdInvestor

In effect, the investment bond is just the tax wrapper in the same way you can put unit trusts inside the ISA and pension tax wrappers.

Investment proceeds within one of these bonds are taxed at 20%, whereas if held direct, they will usually incur no tax at all to a basic rate taxpayer.

This is not how most people think a tax wrapper is supposed to behave.:rolleyes:

Anyone being advised to use a bond to avoid age allowance clawback should thus ask for a comparative illustration to make sure it is worth incurring much higher charges in the bond.

Will the amount saved by not having age allowance taken back be more than the tax charged on the investment returns in the bond?

jamesd

bobdauilda, do not do what it describes but you can find something more creative for a 400000 investment here. As it says, the correct option is to find an IFA and get a professional to draw up a proper plan - what I described is definitely not right, it just illustrates how combining various things can do better.

Premium Bonds offer a poor return. If you want some products from NS&I check out the taxable Pensioners Guaranteed Income Bonds and Index-linked Savings Certificates. They aren't really the best option, but if you like NS&I products they are better than Pemium Bonds.

Please go hunting for a local IFA who is on the NMA (New Model Adviser) remuneration model. Dunstonh who posts here seems an excellent example of the quality of service such people can provide at eminently reasonable rates.

dunstonh

Investment proceeds within one of these bonds are taxed at 20%, whereas if held direct, they will usually incur no tax at all to a basic rate taxpayer.

Up to 20% not 20% and they still have the tax credit. A higher rate taxpayer incurs no further liability but would if held direct.

This is not how most people think a tax wrapper is supposed to behave.:rolleyes:

Most people dont have a clue what a tax wrapper is. The different tax wrappers exist to cover the different scenarios. You pick the one (or more often its more than one) that is appropiate to the circumstances of the individual.

Anyone being advised to use a bond to avoid age allowance clawback should thus ask for a comparative illustration to make sure it is worth incurring much higher charges in the bond.

I don't know how many times this has to be said but investment bonds can be cheaper than unit trusts. They can also be more expensive. Just as buying unit trusts themselves can vary in cost depending on where you buy them.

Will the amount saved by not having age allowance taken back be more than the tax charged on the investment returns in the bond?

Typically, you are looking at lower risk investors in that scenario who are looking for a regular income and invest in a manner to support that. As the tax in a number of areas is no different on unit trusts and ISAs, then yes, the benefits can be worthwhile. Your assumption is that 20% tax is taken and that is incorrect.

Also, using my example of a higher rate taxpayer prior to retirement and basic rate after, they save higher rate tax that would occur on unit trusts. Plus, no CGT liability that would occur on unit trusts. An investment of £100,000 could require someone investing in shares or unit trusts to sell holdings every year and then rebuy later to utilise CGT allowance and could still incur a CGT liability. That isnt required with an investment bond as there is no personal liability to CGT.

Different scenerios, different solutions.

Chrismaths

I'll ignore the first bit about the "extra" charges, that has been addressed many times.

EdInvestor wrote:

Will the amount saved by not having age allowance taken back be more than the tax charged on the investment returns in the bond?

Depends on the mix of dividend income and bond income - you can contruct it so that the tax will be less, or the tax will be more.

[science bit - concentrate!]

Assuming 2 identical set of investments, and that the investor has pension income up to the age allowance threshold, and let

Ai = net dividend income
Ag = capital growth on equities
Bi = net interest income (from bonds, cash)

Then the tax payable if the client holds them directly is:

0.22*(Ai/1.8+Bi/1.6)

If they are held in an investment bond, then the tax payable is:

0.2*Ag

which means that if Ag < 1.98(Ai + 1.125* Bi) then you pay less tax in the bond.

That obviously hard to immediately "feel", so approximately:

"If the capital growth on your equities is less than double the income, you save tax with an investment bond"

Example: If you have £1000 capital growth on equities, £250 net dividends, £250 net interest income, it more or less a toss up between the two.

[/science bit]

That covers a basic rate taxpayer - but if you have a higher rate taxpayer (like dh mentioned), who:
a) has maxed their ISA allowances, and
b) will be a basic rate taxpayer in retirement (close to age allowances)

Then an IB might still be suitable, if the growth on equities is less than 1.25*total net income. HR taxpayers in this situation probably amount to 1 in 25 of the population, and 1 in 5 of Dh's clients

Add in a CGT liability, and the IB wins in all circumstances covered here.

This is why we need tax simplification. It's nuts.