investment bonds/property fund

pal21

I am 52 years old and have just been left some money by a relative, i currently have a 51k mortgage with 15 years left to run, i am currently on a tracker mortgage (capital & repayment) paying £430 p/month. i have been advised as an option to paying off the mortgage in full i could invest £51 in an investment bond using a property fund (eagle Starr), convert my mortgage to interest only wich will be about £240 p/m and draw the allowed 5% per month (about£213) to effectivly pay my morgage and after 15years i would have enough in the fund to pay off the mortgage and still have some cash at the end, are theese investments normally good

dunstonh

i could invest £51 in an investment bond using a property fund (eagle Starr),

Eagle Star dont exist any more. Zurich ceased using the Eagle Star name about two years ago. That said, I have one client left on an Eagle Star investment bond (now Zurich Investment Bond) and that is in the EL3 Property fund and has been a very good performer. If it was new money though, i wouldnt use it again as the Zurich/Sterling Bond isnt as good as the old Eagle Star bond and there are better alternatives.

Plus UK property funds have slowed right up and anyone recommending 100% into UK property tells you that they havent got a clue about investments and that you should steer clear of them.

Other comments would be:
1 - Why arent you using ISA first? (7k per person tax free)
2 - Why arent you using Unit Trusts first? (whilst bond can be better in some circumstances, around 85% of the time unit trusts are more tax efficient than investment bonds)?
3 - Why Zurich? I did a bond last week and Zurich/Sterling didnt make the top 50 products. Mainly due to high charges.

EdInvestor

If you just want to stop having to pay out monthly interest on the loan, then surely the simplest thing would be to switch to an offset mortgage, using the interest on the 51k to offset the interest on the loan?

It's more flexible than paying off the mortgage as you still have access to the capital and your return at current interest rates would probably be about 6-7%, difficult to beat net of charges in a risk based investment like the bond at present.

And anyway, why take risks with your home when you don't need to?Noit advisable at your age IMHO.

dunstonh

Noit advisable at your age IMHO.

He's 52. Not 82.

EdInvestor

dunstonh wrote: »

He's 52. Not 82.

Yes, but his mortgage is currently scheduled to run until he's 67. Most people would prefer to have their mortgage paid off well before that.

jamesd

paal21, using an investment bond as a tax wrapper is potentially interesting if you're a higher rate tax payer, after you've used your ISA allowance. Are you paying higher rate tax, or close to doing that?

Taking 5% of the bond value each year for 20 years will be treated as withdrawing capital and not taxable income, so it can be a good way of drawing an income while leaving the money invested with growth potential than can exceed the mortgage interest rate.

Investing like this, be it in ISAs or other wrappers, can readily beat paying off the mortgage directly over the long term. It's slower to get the money into a tax wrapper with ISAs because of the annual limit so where higher rate tax is involved an investment bond can be interesting.

The investment bond is also potentially interesting in retirement if your total taxable income could exceed about 20,000, since it'll protect you from age allowance reduction.

So, if you're a higher rate tax payer the bond could work well both for the mortgage and later, in retirement.

You do need to consider the investments within the bond, though, because of the limitation dunstonh has mentioned. A single fund is unlikely to be a good idea, whatever it is.

If you're not a higher rate tax payer, a more serious rethink is necesary to work out why an investment bond was suggested.