Distribution bonds

Pobby

Been reading some stuff about these and I am lead to believe these are quite good for the risk adverse (that`s me.)

Debt free and mortgage free our one failing is in our pensions which split between us will be full state each,around £50 between us Serps and combined private pension of around £5k per year.

We are maxed out in cash Isa but have around a further £110k to invest>we are thinking of a 5 years distribution bond for £70k plus a further £4k each to use up the stocks and shares part of this years ISA allowance.The rest we will keep in a high rate savers account.

In addition we have freed up a further £300 per month outgoings and intend to save £500 per month.

I am due to retire in 6 and half years.Does this sound like a plan?

Mr_Mumble

Distribution bonds pay capital gains tax at 20%. Unless you're using up your annual CGT allowance it'd be more tax-efficient to invest in funds under the "cautious managed" sector.

dunstonh

Distribution bonds pay capital gains tax at 20%.

Only on the gains. Income still benefits from tax credits in the same way as unit trusts. Plus the charges on distribution funds tend to be much lower than unit trusts. Also, the Govt is in consultation with the insurance industry at the moment and there have been repeated comments in the media that the Govt is likely to make the 20% CGT the same as personal rate at 18%. That last part is a wait and see but the CGT costs would almost certainly be offset against the lower charges.

Personally, I am not a big fan of large contribtutions into a distribution fund. I would prefer to build my own spread of funds to match the exact risk profile and get closer to the required yield. However, if you want a lazy option, then there are some good distribution funds out there and the charges are usually low.

They are not for the risk adverse though. They are cautious.

EdInvestor

dunstonh wrote: »

Also, the Govt is in consultation with the insurance industry at the moment and there have been repeated comments in the media that the Govt is likely to make the 20% CGT the same as personal rate at 18%.

What repeated comment in the media?I haven't seen any. The 20% is insurance company corporation tax, which is charged on these bonds. The capital gains tax on unit trusts and shares has now been reduced to 18%, which makes these bonds non viable even for higher rate taxpayers.

For a basic rate taxpayer, they have always been a bad deal.This is because the 20% is charged on gains whether they are realised or not.With unit trusts, no tax is charged if the gains are not realised, and there is an annual allowance of 9,200 worth of tax-free realised gains before the tax kicks in.

So it would be must more sensible to choose a selection of unit trusts in the 'cautious' area, buying through a discount broker such as https://www.h-l.co.uk.It which will rebate the intial charge and part of the annual charge.There is no need to pay unnecessary taxes to get the same investment through a wrapper which also is often more expensive and infested with restrictions and penalty charges..

dunstonh

So it would be must more sensible to choose a selection of unit trusts in the 'cautious' area, buying through a discount broker such as HL.

Cost up a cautious spread on a bond and a unit trust for say a £100k investment and watch the bond come in significantly cheaper than the unit trusts.