Cautious multi asset income fund recommendations

smjxm09

[FONT=&quot]Thank you all for the reassurance, so I have nothing to worry about?

[/FONT][FONT=&quot] The expected growth rate is 5.5% at the moment which is reviewed every 3 months but seems consistent over the years but the Pru can and does does alter the price point which has dropped 2.4% for the last quarter so it is not really 5.5%.
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[FONT=&quot]Basically on my ISA, which was funded with 2 transfers over the year, despite it achieving its 5.5% EGR the value of the fund is lower than the investment after 12 months while the wife who funded hers in different months and missed a price point drop has made a small gain.[/FONT][FONT=&quot] These two ISA's are not being drawn on at the moment so no income is being taken. We have a joint non ISA fund that is being drawn on at 3% thus the drop in units.[/FONT]

[FONT=&quot]What spooked me was a reply direct from the Pru via email[/FONT]

“PruFund does not produce a natural yield and does not produce an income as it’s a life fund. Income can be taken from the ISA up to 5% but not directly from the fund as a yield”

“There is no income produced as this is a life fund and not an OEIC. The unit price grows in value by the addition of the EGR”

“If you draw an income of 3% then 3% of your units will be sold”

Fund document at https://www.pruadviser.co.uk/pdf/INVS11397.pdf
which also shows product history.


The bottom line is that I don’t want to run out of money by drawing an income of 3% and running out of units and want to pass on as much as possible to my children.

Also as you will have noted I see things in black and white which is why I have asked here for a second opinion.Thanks

bostonerimus

Your last post makes me think that you have some sort of permanent insurance policy that contains the Prufund. Is that right.

smjxm09

It has a small amount of life cover at 100.1% of the fund value that pays out on death.


Can't say I have got my head around the life cover bit and whether that offers me or my estate any benefits if I die.


What I do know is if I don't draw income above 5% on the non ISA policy I won't pay any tax despite it being a non ISA product. Something to do with top slicing and deferred tax

dunstonh

It has a small amount of life cover at 100.1% of the fund value that pays out on death.

That is normal with an investment bond. It is just enough to qualify it as the life assurance tax wrapper.

Can't say I have got my head around the life cover bit and whether that offers me or my estate any benefits if I die.

it is not there for any other reason than to ensure it qualifies as a life assurance tax wrapper.

What I do know is if I don't draw income above 5% on the non ISA policy I won't pay any tax despite it being a non ISA product. Something to do with top slicing and deferred tax

Correct. Its not tax free as there is internal taxation but there is no tax payable by you unless you later become a higher rate taxpayer.
Plus, investments bonds are outside of means testing (in case that ever happens to you as life assurance is disregarded)

redux

smjxm09 wrote: »

[FONT=&quot]Thank you all for the reassurance, so I have nothing to worry about?

[/FONT][FONT=&quot] The expected growth rate is 5.5% at the moment which is reviewed every 3 months but seems consistent over the years but the Pru can and does does alter the price point which has dropped 2.4% for the last quarter so it is not really 5.5%.
[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Basically on my ISA, which was funded with 2 transfers over the year, despite it achieving its 5.5% EGR the value of the fund is lower than the investment after 12 months while the wife who funded hers in different months and missed a price point drop has made a small gain.[/FONT][FONT=&quot] These two ISA's are not being drawn on at the moment so no income is being taken. We have a joint non ISA fund that is being drawn on at 3% thus the drop in units.[/FONT]

[FONT=&quot]What spooked me was a reply direct from the Pru via email[/FONT]

“PruFund does not produce a natural yield and does not produce an income as it’s a life fund. Income can be taken from the ISA up to 5% but not directly from the fund as a yield”

“There is no income produced as this is a life fund and not an OEIC. The unit price grows in value by the addition of the EGR”

“If you draw an income of 3% then 3% of your units will be sold”

Fund document at https://www.pruadviser.co.uk/pdf/INVS11397.pdf
which also shows product history.


The bottom line is that I don’t want to run out of money by drawing an income of 3% and running out of units and want to pass on as much as possible to my children.

Also as you will have noted I see things in black and white which is why I have asked here for a second opinion.Thanks

It's not the same thing, but think about a fund or OEIC that has different categories of units available. There might be some called income units and others called accumulation units.

To someone who wants to roll up their whole investment without an income yet, it doesn't make much difference whether they have income units with the income units reinvested, or accumulation units. The difference on a statement will be one account has an increasing number of units from the reinvested dividends, while the other has a constant number of units, and these gradually increase in value a bit faster than the income fund.

What you have is analogous to the accumulation units.

But even this doesn't have to be a hard and fast rule. Someone with income units might withdraw the dividends or reinvest them, as already mentioned. Someone with accumulation units can leave it all to roll up, or get an income if desired by selling a small proportion of the units each year. This is what your investment is doing.

As the others have already suggested, even though your number of units will gradually decrease, they will be increasing in value slightly faster than an alternative which is defined as a constant number of units.

You won't sell the same number of units each year; it will gradually reduce, a ratio not a linear reduction. I think this is part of your mental block at the moment. But 3% of 60,000 is less than 3% of 62,000, then 3% of 58,000 is a smaller number again.

Thrugelmir

smjxm09 wrote: »

[/FONT][FONT=&quot] The expected growth rate is 5.5% at the moment which is reviewed every 3 months but seems consistent over the years but the Pru can and does does alter the price point which has dropped 2.4% for the last quarter so it is not really 5.5%.
[/FONT]

Taking the UK equity market as an example. Over the past 100 odd years the compound rate of growth with income reinvested has averaged just over 5%. (That's above inflation but with no costs taken into account). Must stress the word average. As different time periods produce very different results.

However based on growth alone. With no income reinvested. The average falls to just 0.5% (again above inflation). Making due allowance for costs, growth could very soon be wiped out.

If the fund holds bonds or other fixed interest stocks. Then the equity part of the portfolio is going to have to perform above the long term average to compensate. An unrealistic expectation.

You may need to reset your expectations. There's good reason behind the past decade of markets performing exceptionally well. Cautious fund investing with high growth levels and income seems a nigh impossible remit to fulfill.

smjxm09

Both the Pru fund where I don’t buy units when I don’t take an income and my plain and simple Fidelity account which does buy units have a fundamental difference. One maintains the units minus fees and pays the natural yield while the other one gradually sells the units but relies on the EGR to be higher than the percentage taken.

So Fedelity pays me a variable monthly amount depending on the income earned in a particular month while the unit price is independent of that income. The Pru on the other hand will pay me a percentage that is dependent on the unit price.

Is one product better than the other or are they doing the same job but in different ways?

dunstonh

Is one product better than the other or are they doing the same job but in differt ways.

Similar but the Pru has some capital protections that the other does not have. Plus, if you go down the UT route they are included in means testing.

bostonerimus

dunstonh wrote: »

Similar but the Pru has some capital protections that the other does not have. Plus, if you go down the UT route they are included in means testing.

dunstonh, I have a question. In the US a permanent life insurance policy is usually used to reduce inheritance tax. Sometimes people will buy them when they have maxed out all their pension and tax advantages ways to save, but the high fees often mean that they'd be better off just saving in a taxable account. Is this broadly the same in the UK?

dunstonh

In the US a permanent life insurance policy is usually used to reduce inheritance tax. Sometimes people will buy them when they have maxed out all their pension and tax advantages ways to save, but the high fees often mean that they'd be better off just saving in a taxable account. Is this broadly the same in the UK?

There are potential overlaps. However, in 2019 (and for a long time) investment bonds in the UK are available on exactly the same terms as ISAs, pensions and unwrapped using the exact same funds. So, not cost difference. There are still expensive options out there but that goes for all options. Historically, investment bonds had unique versions only available on that wrapper. Mainly from the insurance companies. Not many of those left nowadays.

I haven't put in place an investment bond for about 8 years. Nor has any adviser that works for me. However, we are not big in the estate planning market as Norfolk & Suffolk has low property values and wealth tends to be average. If you look at the filtering that takes place when picking tax wrappers, an investment bond is now a very niche option that is only suitable for a very small number of people.

That said, I do still have some 1990s and early 2000s Pru, CM and Aviva investment bonds on our books which are very good value and do exactly what they are required to do. Not modern. Not flexible but year in, year out they do what is needed and at 1% p.a. cost or less (all in). We tend to bed & ISA/pension from the Aviva and CM ones but leave the Pru ones in place.

Your wouldn't use them today for the vast majority (and cant use the pre-RDR ones which, are often priced better than the post RDR ones). So, when someone is talking about buying an investment bond, my first reaction is to question why. However, if they have, say, a late 90s/early 2000s Pru investment bond then I am quite comfortable with that.

Historically, investment bonds were a way to avoid the age allowance reduction (age allowance no longer exists). They were a way to avoid CGT (most people can operate within the annual allowance and even if they do generate CGT, its at a lower rate nowadays). They can avoid higher rate tax through the use of deferment (but the high annual ISA allowance, pension and unwrapped dividend allowance means that most dont need to avoid higher rate tax). So, that really only leaves trusts nowadays.