Investing a LARGE lump sum for income

bowlhead99

koru wrote: »

With the kind of money you have to invest, it might be worth looking into getting hold of some of the IFA training material, if that's possible for someone who is not actually trying to become an IFA.

That's quite an interesting idea - if the OP is intending to retire 20+ years before standard retirement age, one assumes he's got the youthful enthusiasm and mental faculties to pick up the theory; he's expressed a desire to manage/monitor investments rather than play golf, and his ample finances mean he's not constrained by only being able to afford a second-hand copy of Smarter Investing as is recommended ad nauseum on here.

There is a bit of a difference between being an IFA and an active investment manager though, and it would be harder to do either well without getting the practical experience of learning in a work environment and a support network. But I think the idea of getting some finance training is not a bad one if you're both cash- and time-rich. You don't need to stop at "investing for dummies" or the like.

On a portfolio of £1 million, an IFA would probably hope to make fees of £5000-£10000 upfront and further maintenance fees and potentially quite a bit higher. So, if you invest the time to educate yourself so that you don't need to incur these fees, you will effectively "earn" £5-10,000 in fee savings. And don't forget that this would be equivalent to more than £8-16,000 of pre-tax income (for a higher rate taxpayer).

Agreed, 5-10k is a lot more than the price of a book. Presumably the IFA can give you a consultation and fifty hours of work at £200ph for your 10k and set you off on your journey right now, while taking a few months out of the market to read the books until you feel confidently competent, could easily cost you 5-10k in missed income and growth, so perhaps that is a counterpoint.

For instance, unless you are paying very significant fees I doubt that an IFA will take the time and trouble to think about which investments would be best to shelter in tax wrappers such as an ISA or pension.

I don't use an IFA myself as I have a reasonable financial background and I don't have huge sums to invest in any case so it's relatively more expensive to buy advice. However, if I did use one, based on everything I've read from the IFAs on this site- my bare minimum expectation, the least I'd hope for and expect, would be that they would suggest what tax wrappers are appropriate and what investments would best it in each, for my needs.

Perhaps I'm overestimating the scope of what a regulated independent financial adviser does for a living, but I presumed the clue was in the name? Maybe hanging out on this site has positively coloured my expectations because the crappy ones don't bother to sign up for an account here and make hundreds of competent-sounding posts...

planteria

great thread. i hope it has been, and will be, helpful to Mr Dudley.

the Tim Hale book is 'Smarter Investing', is that right:question:

Ifts

planteria wrote: »

the Tim Hale book is 'Smarter Investing', is that right:question:

Yes thats right.

Thanks to stardust09 for pointing this out in another thread -

stardust09 wrote: »

There is a new edition of Tim Hale's book coming out in October, for those of you who are interested.

edit:

planteria wrote: »

the new edition in October of this year?

According to Amazon yes.

planteria

thanks Ifts, the new edition in October of this year? i might get hold of a copy, but if it's really good i want to read it this summer

chucknorris

horlicksjan wrote: »

Are ground rents a low risk investment (do you have security with rights over the property as you say, if the rents are not paid?) In the current climate a fixed return of 6-7% without the volatility and downside risk of equities sounds very good. So why aren't more investors into ground rents? What's the catch/downside?

I looked into these last year, I found that around 5% is more likely (but I am talking about ground rent only i.e. not additional profit from insurance and management). I believe it is secure in that you can eventually get any monies owed but after talking to some existing investors they did say that they always seem to be chasing some slow payers (but eventually get paid). It is still something that interests me but not enough to have taken the plunge yet.

I have seen smaller freeholds (<20k, but I would rather have one or two large ones rather numerous smaller ones) give better returns at auctions, but anything over 100k seems to be around 5%.

EDIT: The ones I have seen yielding around 5% tend to have an escalation clause, something like doubling the ground rent every 25 years which of course means that you will get capital growth as you near/arrive at that 25 year milestone. Some better ones were actually linked to RPI at shorter periods of 5-15 years (but I haven't seen many of these).

jem16

koru wrote: »

Plus, potentially, you might make a better job of it and therefore get a better return on your money. For instance, unless you are paying very significant fees I doubt that an IFA will take the time and trouble to think about which investments would be best to shelter in tax wrappers such as an ISA or pension. In my view, it is best to put the highest yielding investments in the tax wrappers, particularly if you are a higher rate tax payer who would otherwise be paying 40% tax on the income. (Others might feel other types of investment are better in wrappers, but the point it that you should think about it.) Lower yielding investments will tend to have higher capital gains, but it is often possible to shelter these by triggering gains to use up the annual CGT allowance, and again this is not something that an IFA is likely to do for you unless you are paying top dollar.

Koru, is this based on experience of using an IFA? What would you regard as paying top dollar?

What you have described above is exactly what my IFA has been doing with my investments for the last 7 years. Highest yielding funds and Fixed Interest funds are inside my ISA and Investment Bond and low yielding funds are held unwrapped. Each year Bed&ISA is done to use up my ISA allowance.

Each Suitability Report details the reasons for each tax wrapper being used.

I would expect all IFAs to be doing this as that is what their advice is for.

koru

jem16 wrote: »

Koru, is this based on experience of using an IFA? What would you regard as paying top dollar?

What you have described above is exactly what my IFA has been doing with my investments for the last 7 years. Highest yielding funds and Fixed Interest funds are inside my ISA and Investment Bond and low yielding funds are held unwrapped. Each year Bed&ISA is done to use up my ISA allowance.

Each Suitability Report details the reasons for each tax wrapper being used.

I would expect all IFAs to be doing this as that is what their advice is for.

This is based on my experience of talking to two or three of them and being astonished to find that they would not be doing this sort of optimisation. I'm pleased to hear that you are receiving this sort of service. Do you mind me asking what percentage fee the IFA is receiving for this, taking into account any commission?

I don't really know what constitutes top dollar in terms of IFA fees, but there was no way that I was willing to contemplate more than 0.5%, and I concluded that this did not seem to be enough to get the sort of service I would expect.

koru

Ark_Welder wrote: »

On £1m, the gain required to exceed the current annual CGT allowance is just over 1%. Assuming that half this amount can be put into ISAs and a pension, the CGT allowance would be exceeded by a gain of just over 2%. For a growth portfolio, that would be a rather low return each year. So assuming that such a portfolio would grow at a faster rate then trying to manage CGT just using the annual allowance might soon run into difficulties.

It's a good point, although I was not necessarily arguing that CGT could be avoided altogether. I was just illustrating the sort of factors that you would need to feel comfortable thinking about if you decide to DIY.

Ark_Welder wrote: »

However, if the investor did have enough knowledge to manager their own investments they could look at using an IFA to set up an investment bond through which to make their fund selections. Changing between funds within such a bond does not trigger CGT. Plus, they could withdraw a certain level of income that would not be taxed at 40% or higher. But they would have to consider what their likely situation would be in 20 years' time. So paying £10k upfront and having an investment bond set up, as well as the ISA & SIPP etc, might enable the investor to save even more than that within a few years.

This was the solution recommended by an IFA to me a while back, but the annual fees on this structure were pretty large. I decided that it was pretty unlikely that I would benefit sufficiently from this that the benefits would outweigh the extra costs. Also, my intuition told me that, although I understand this is a tried and tested tax planning device, I did not feel comfortable relying on it. This is the same intuition that, for instance, told me to steer clear of endowment mortgages, which turned out to be a good call. Doesn't mean I'm right in relation to investment bonds, but it's why I chose not to go with them.

koru

bowlhead99 wrote: »

That's quite an interesting idea - if the OP is intending to retire 20+ years before standard retirement age, one assumes he's got the youthful enthusiasm and mental faculties to pick up the theory; he's expressed a desire to manage/monitor investments rather than play golf, and his ample finances mean he's not constrained by only being able to afford a second-hand copy of Smarter Investing as is recommended ad nauseum on here.

There is a bit of a difference between being an IFA and an active investment manager though, and it would be harder to do either well without getting the practical experience of learning in a work environment and a support network. But I think the idea of getting some finance training is not a bad one if you're both cash- and time-rich. You don't need to stop at "investing for dummies" or the like.

Agreed, 5-10k is a lot more than the price of a book. Presumably the IFA can give you a consultation and fifty hours of work at £200ph for your 10k and set you off on your journey right now, while taking a few months out of the market to read the books until you feel confidently competent, could easily cost you 5-10k in missed income and growth, so perhaps that is a counterpoint.

Good points. Even if you decide to use an IFA, educating yourself beforehand will equip you to decide whether your IFA is competent and honest or not. Although doing IFA training might be a bit excessive in this scenario! If you decide not to use an IFA, then you really do need to commit to some serious effort to educate yourself. I would guess several man weeks, although I'm sure that IFAs spend longer than this studying the various things they need to understand.

jem16

koru wrote: »

Do you mind me asking what percentage fee the IFA is receiving for this, taking into account any commission?

I am paying 0.5%pa with all commission rebated.