Endowment update: payouts still falling

dunstonh

mayb, had the old economy continued, mortgage rates would be around 50% higher than they are now. Inflation would be higher eroding our income and savings faster. The property price boom wouldnt have happened. Unemployment would be higher

A typical mortgage would be around £100pm-£200pm more than it currently is. 15 years paying £100pm more is £18,000 extra. Most endowments are not going be paying out £18,000 short (obviously some exceptions).

The move to a stable, low inflation economy has been beneficial to us in so many ways. However, one of the negatives has been the impact on endowments. If you balance it out, you would have to take the poor endowments and better economy every time.

Unlike the position with an endowment ( or an investment bond) , where the divis are subject to 20% life company corporation tax, as are any capital gains.

Ed is being economical with the facts.

The rate of Corporation Tax applicable to the fund is 20% on interest, overseas dividend income and rental income. So that is correct. However, dividends from shares in UK companies are effectively received net of tax and no further tax is paid on these dividends. The 10% tax credit on these satisfies the fund’s liability.

So, for income, there is little or no difference between life funds and unit trusts and oeics.


The big difference is in capital gains tax.


Corporation Tax is paid on the capital gains of the funds at a rate of 20%. Indexation relief may reduce the fund’s corporation tax liability on disposal of an asset. The level of tax deemed to have been paid within the fund is currently 20%. Generally there is no further tax liability for non, starting or basic-rate taxpayers when a chargeable gain arises as a result of a chargeable event. No reclaim of tax paid within the fund is available.

The fund also has to suffer a chargeable gain to pay the tax. It isnt paying 20% on all returns. For example, a property fund would pay no capital gains tax unless a fund manager disposed of a property. Many income focused funds can avoid much of the capital gains tax.

EdInvestor

dunstonh wrote: »

The big difference is in capital gains tax. Corporation Tax is paid on the capital gains of the funds at a rate of 20%.

Indeed. But on investments held directly with no endowment or bond wrapper, normally a basic rate taxpayer will pay no CGT at all. This is paretly because no tax is payable until you actually sell the shares ( ie paper gains are not taxable) and for any gains that are realised, there is an annual allowance of almost 9k a year, which usually covers any sales.

No reclaim of tax paid within the fund is available.

So you pay 20% tax in the bond and nothing outside it.

Generally there is no further tax liability for non, starting or basic-rate taxpayers when a chargeable gain arises as a result of a chargeable event.

The above are the "weasel words" the advisors use when selling products such as endowments and investment bonds to make you *think" you are avoiding tax.But the exact opposite is the case.

dunstonh

So you pay 20% tax in the bond and nothing outside it.

On income there is no difference. On capital gains you may or not depending on your gain and it depends on how much indexation allowance there is.

The above are the "weasel words" the advisors use when selling products such as endowments and investment bonds to make you *think" you are avoiding tax.But the exact opposite is the case.

They were copied and pasted from information taken from HMRC. Last I heard, the Inland Revenue didnt sell products such as endowments and investment bonds.

However, i could compare them to the "weasel words" Ed uses when she tells people in the investment forum that income from shares is tax free when they are not.

Gorgeous_George

EdInvestor wrote: »

It is IMHO *highly unlikely* that you'll get anything like 6.65% from your SL endowment,where did you get that idea from?(

The graph that your original link refers to shows that £50 per month with SL would return £38338 over 25 years, ending 2007. Unless my maths is wrong, I make that 6.6% or thereabouts. (The link says that these figures are for a savings endowment rather than a mortgage endowment).

Endowments ending later than 2007 may do better (IMO) because the final, most important, years could enjoy better returns i.e., not suffer the effects of 9/11 so much a sthose ending 2007 (although the impact of the interfering FSA could tarnish this).



GG

EdInvestor

Hi GG

You have to take into account that well under half of the WP fund is invested in equities now (almost 80% "before the fall") , and also that a large chunk of the returns has to go to paying the pension investors who have a guaranteed return and are ahead of you in the queue.Then there's the not insignificant problem that the managment lost the free assets ( 8bn quid's worth!) in 2002, that was the terminal bonus backup money.

It's 4%, believe me.Maybe a tiny bit more max.Listen to what the managment has said repeatedely: payouts will continue to fall.

mayb_2

originally posted by dunstonh:
"mayb, had the old economy continued, mortgage rates would be around 50% higher than they are now. Inflation would be higher eroding our income and savings faster. The property price boom wouldnt have happened. Unemployment would be higher"

dunstonh I recognise this is an attemt to have me put away for life - either as insane or for murder - but you had better put your fingers in your ears as I have started to screammmmmmmmm!

Are you going to tell me here and now what the average rate of interest is going to be over the average 25 year mortgage? Are you going to be able to tell me that mortgage rates will not go up in the future?

As far as I am aware the governments preferred measure of Inflation does not include mortgage interest rates and some wages are not even keeping up with inflation, public sector workers face average rises of just 1.9% (nurses pay for instance). This is a pay cut in real terms. The cost of my rates has just gone up above inflation and my water rates are up too. Not something a home owner can avoid paying. The property price boom is only helping those people who can release the equity in their property in some way but is making buying a first home virtually impossible. We all do still have to live somewhere.

I don't know what papers you read that feed your fantasies dunstonh but I speak for those who live in the real world - ie not one lived in by those in the Finance Industry who can see trouble coming and discuss amongst themselves ? what to do to avoid losing out - and who would probably avoid selling themselves a duff policy/investment no matter how high the commission might be.

dunstonh

Are you going to tell me here and now what the average rate of interest is going to be over the average 25 year mortgage? Are you going to be able to tell me that mortgage rates will not go up in the future?

You could easily go up again and you could easily see endowments come back on track again.

I don't know what papers you read that feed your fantasies dunstonh but I speak for those who live in the real world

Its called economics. Its fairly simple to understand the basics if actually want to listen. However, for some its simpler just to ignore it and be negative about everything.

mayb_2

You may be suprised to know that I do have a qulification in Economics dunstonh and I more than understand the basics. By the way you didn't actually answer the questions or reply to my arguments regarding the real rate of inflation and its comparison to wage rises. Some of us do still earn a wage - increases in which depend rather more on the rate of inflation than commission.

"you could easily see endowments come back on track again." I wont hold my breath on that one - many of the With Profits funds are closed or may as well be. Really dunstonh - just how easy would that be considering many of those affected by failing mortgage endowments have cashed them in as part of their settlement?

dunstonh

I didnt see any question about inflation.

I am surprised to hear that you have qualifications in economics as you fail to understand how the economy has changed over the last 10-15 years.

Some of us do still earn a wage - increases in which depend rather more on the rate of inflation than commission.

Perhaps it is this bitterness that clouds your judgement.

jamesd

mayb, it'll be tough for those with lots of fixed interest investments but those with lots of equities could end up on track. Those delivering cautious final bonuses now may end up seeing the proportion of their funds held in equities increasing as they no longer have to keep enough fixed interest money to pay for the guarantees of those who have left. That will make it easier for them to recover so long as the markets continue to rise.