Norwich Union Portfolio Step-down: any good for income for a 63-yr-old?

nrsql

I'll agree with that.
A lot of people seem to advise that you shuoldn't try to time the market though - good for the seller if they want to get a continuous stream of money input and don't want to assess market conditions but rather go with a fixed allocation spread.
Sounds like this IFA does take notice of the market somewhat though - but maybe only after prompting.

In current conditions (and the past year) I wouldn't put large lump sums at risk - either wait in fixed interest or drip feed.

From your posts you seem to be very concerned about short term downturns so that might have been a more comfortable strategy for you but might exclude some products.

aspiration_2

Dunstoh, thanks for all the intricate advice you have been giving.

You said in a recent post:

{Does the documentation (suitability report) explain why the more tax efficient unit trusts were not recommended? There could be justification as I mentioned but age allowance doesnt apply. Higher rate tax doesnt either. Low cost could if it was on reduced commission but Lloyds dont do that. So, you are probably losing about 0.8% a year because they have recommended the wrong tax wrapper. (That 0.8% is taken from the FSA)}

Could you please give some examples of tax efficient funds ?

dunstonh

Could you please give some examples of tax efficient funds ?

Its not the funds but the tax wrapper. You need to think of investing as three things 1) funds 2) tax wrapper 3) charges (2 and 3 can combine with each other as there is no point saving say 0.85 in tax only to pay 1% more in charges so you need to combine those.

Tax wrappers are where the tax efficiency is. The UK has way too many tax wrappers but the key ones for the average investor are

Pension
ISA
Life
unwrapped (technically not a tax wrapper but unwrapped means you have default taxation applied to it)

In this example, we will consider unwrapped to mean unit trusts/oeics and sicavs as they are what the majority use (i will refer to these only as unit trusts or UT from now on).

The same funds are available in all of these tax wrappers. So it then comes down to tax and charges and how you want the money.

Pensions are the most tax efficient. However, they have a defined maturity process which is geared towards income provision and not capital. Pros and cons of pensions is for another thread and there is a good one in the pensions section called ISAs vs pensions and its stickied at the top.

ISAs are next on the efficiency list. No personal liability for income tax. No impact on age allowance (for over 65s) and no liability for capital gains tax.

Now we get to to the point where it gets technical and where different circumstances can make one better than the other for one person but worse for another. Investment bonds or unit trusts.

Unit trusts have no further liability for income tax for a basic rate payer unless the dividends take them into higher rate. There is the potential for Capital gains tax to apply but you have an annual personal allowance which you can utilise.

Investment bonds have no further liability for income tax for a basic rate taxpayer or higher rate taxpayer as long as you don't draw more than 5% out in the year. The bonds benefit from the same tax credit as unit trusts. Capital Gains are taxed within the fund at up to 20%. Growth in value on the bond gives you no liability for CGT yourself (so its exempt from CGT for you). If you make a withdrawal over 5% then you create a chargeable event and there is top slicing relief potentially available which can be used by basic rate taxpayers and can stop them going into higher rate.

They are basics. However, there are scenarios which favour one or the other. I will list a few

1 - Investment bonds use life funds are are classed as life assurance. This means that the capital is not included in the means test for pension credit or local authority care. Withdrawals are treated as income though. Also, you cannot put the money into a bond after pension credit or local authority care is known about being applicable. Its too late then. Unit Trusts are included in the means test.

2 - Higher rate taxpayers will pay higher rate tax on the income from unit trusts. Investment bonds have no liability for higher rate and are assessed when you create a chargeable event. So a higher rate taxpayer now who will be basic rate later can use an investment bond, not pay any higher rate tax on it and then cash it in when they are a basic rate taxpayer (using top slicing relief) and avoid any higher rate tax. If the person will still be a higher rate taxpayer then there is no gain apart from gross roll up as the higher rate would be charged on surrender as it only got deferred.

3 - As from April 2008 it is proposed that capital gains tax will be 18%. Investment bonds will still be upto 20%. So those using investment bonds in the past to avoid 40% CGT may now be better off switching to unit trusts. However, that is yet to be cast in stone and the treasury is considered equalising the 18%.

4 - fund switches in unit trusts are classed as a disposal for CGT purposes. Fund switches in an investment bond are not.

5 - Investment bonds can be placed in trust (estate planning typically) but unit trusts cannot.

6 - age allowance. Income from unit trusts gets added to your income and if you are over 65 and earn close to or over £20,900 then you start to lose your age allowance (increased tax in other words). Investment bonds do not suffer this until you have a chargeable event (taking more than 5%p.a.)

There are others but that is just a sample.

Investment Bonds are usally geared and priced for larger investments. I would say £100k plus with improvements available at £250k, £500k and £1mill. Obviously at those levels it is important to consider taxation. For basic rate taxapayer with investments under £50k -99k I would "generally" say that unit trusts are the better option (unless a specific tax advantage can be identified). Even with higher amounts unit trusts could be better as the charges on the bond may wipe out the tax benefit (which is why I mention low cost). Some investment bonds are dinosaurs and priced on a scale that was designed back in the old endowment days. Others are very well priced and can result in half the charges of the unit trusts. However, the same can be said for some unit trust providers who bolt on extra charges.

There are many things I havent mentioned that could swing you between bond and unit trust and could be exceptions to the above but its getting complicated as it is without me listing every exception. I will stop there for the moment.

aspiration_2

Dunstoh

Thank you very very much for your post.

You appear to have clearly understood the confusions in my understanding of tax matters.

Wurz

Well, Scottish Widows excel themselves. I just went on line to check the value of my bond, really just to see how much I've lost since last Friday, 18th Jan, when SWids' had received my cancellation letter, and guess what. The value shown is still dated 18/01/2008. Now last week you could get the weekend figures and then the Monday figure. This week, nah, can't be bothered, so I will have to telephone tomorrow morning (remember that SWids' said that they would not honour the valuation on the day the letter is received, but the value of the bond at the close of business the next working day. That of course, is TODAY Monday 21st January, having endured Saturday, Sunday, and now today, Monday, and no value posted. Never happened before so again I pose the question, Is Scottish Widows the next Northern Rock? Or is it just that they cannot be bovvered. Mind you, Northern Rock shares have just risen 40% whilst the rest of the world says the markets are the worst since the 1930's so go figure. Call me cynical, but what's the odds that my bond actually rose over the past three days? Or is it more likely that SWids' are too embarrassed to post figures?

jamesd

Wurz, you could always try looking up the funds on some system other than the Scottish Widows one:

• Scot Wid Property Bid GBX 737.30 21-Jan-2008
• Scot Wid Newton Managed Bid GBX 146.90 21-Jan-2008
• Scot Wid Invesco Perp High Income Bid GBX 223.00 21-Jan-2008
• Scot Wid Cautious Portfolio Bid GBX 114.80 21-Jan-2008
• Scot Wid Balanced Solution Bid GBX 98.20 21-Jan-2008

You could also use the portfolio tool at Morningstar to get a more convenient valuation of them all on one page but it's probably not worth setting it up now. It's one of the ways that I track my own investments.

cheerfulcat

jamesd wrote: »

What you should really have done is noted the terrible start to the year, said to yourself "that's a terrible start to the year" and carried on taking your income while waiting for the markets to improve.

Problem is, taking an income from an investment bond generally involves selling units, thus compounding the loss.

For the first six months of this year you might well be best advised not to use equity much and stick to corporate bonds and cash

While I can't disagree that this is a bad time for a risk-averse investor to be holding equities, it should be pointed out that the current crisis involves the credit markets - I would be very leery of corporate bonds!

To Wurz -

Northern Rock shares have just risen 40% whilst the rest of the world says the markets are the worst since the 1930's so go figure.

Northern Rock bucked the trend because of the government bailout announced this morning.

jamesd

cheerfulcat, true about the bonds having more risk than usual right now.

Wurz might have got in with the sell instruction before today's announced 180 day freeze on redemptions of the property fund.

dunstonh

The value shown is still dated 18/01/2008. Now last week you could get the weekend figures and then the Monday figure.

The value would be 18/01/08 as that is close on Friday. The next change occured today and gets updated tonight.

so again I pose the question, Is Scottish Widows the next Northern Rock?

You failure to understand how things work doesnt make LloydsTSB (who own Scottish Widows) the next Northern Rock.

whilst the rest of the world says the markets are the worst since the 1930's so go figure.

Its the worst since 2001 in a single day. Not the 1930s. The FTSE dropped 45% during the early 2000s. We are down around 20% currently.

Call me cynical, but what's the odds that my bond actually rose over the past three days?

Saturday and Sunday are not working days so no change and you just have Monday and figure will be available on that tomorrow morning.

Or is it more likely that SWids' are too embarrassed to post figures?

They have nothing to be embarrassed about. Its not like they are chosing the investments and proably arent even managing the investments as most decent funds are external funds with no connection to the provider of the tax wrapper (low risk funds tend to be the exception).

Wurz

Phew, received a letter today (Tuesday 22nd January'08) from Scottish Widows basically saying that they are sorry I have decided to surrender my bond "because of the performance of the funds you are invested in" (This was the £100k bond I took out in Jan'04.) The letter went on to say that "You had hoped that, whilst taking a regular withdrawal of £375.00 per month or £4500 per year, your original investment of £100,000.00 would remain intact or increase in value." The letter goes on to say:

"This would have required a sustained growth of 4.5% minimum to maintain the original investment. Unfortunately your original investment amount has reduced because the combined growth of (get this) your chosen funds has not exceeded the percentage required." the letter finishes with "I do understand your disappointment with the return on your bond"

Ah well, that's alright then, charge me a penalty for cashing in before I lose more. What they are saying is that they could not make 4.5%.

Meanwhile, National Savings, you know, the one where anyone who distrusts everyone will put their money, will pay 5.2%. So Scottish Widows, with their powerhouse advisers, or as the Daily Mail describes it: "SWIP claims in it's marketing literature to have one of the strongest and most experienced bond teams in the industry." they go on to say on 16/01/08 "Unfortunately investors haven't seen much evidence of this". SWid's therefore, cannot beat the lowest provider.

Fortunately (!?) I only lost another £40 over the weekend and will get back £91618.03 (Gotta get the pence right) from my £100k. It's amazing how other family members of mine say that they had the jitters a month ago and cashed all their bonds in. Wish I had, would have got at least £4 grand more! Mind you, they didn't warn me-so much for family loyalty! The only thing I can be grateful for is that I pulled before some had locked in their bonds. Now, if I've stopped anyone from investing in Scottish Widows I feel better. I will now dedicate my online missives to ensuring that Lloyds and Scottish Widows do not dupe anyone else to buy their "bonds".

But hey, with advice from contributors like dunstonh. jem16 and jamesd, (and any others over the past year I've missed) we/I will win over the the conglomerates.