Income Bonds

JONTY_2

CAN ANYONE GIVE ME AN IDEA OF HOW INCOME BONDS WORK, I HAVE A LUMP SUM TO INVEST & WOULD LIKE A MONTHLY INCOME FROM IT BUT NOT TOO SURE HOW THEY WORK, TAX IMPLICATIONS etc & HOW SAFE MY INVESTMENT WOULD BE. (FORGOT TO SAY 61yrs OLD SINGLE & TAKEN EARLY RETIREMENT/REDUNDANCY).

dunstonh

HOW SAFE MY INVESTMENT WOULD BE. (FORGOT TO SAY 61yrs OLD SINGLE & TAKEN EARLY RETIREMENT/REDUNDANCY).

firstly, please dont use CAPS. It indicates you are shouting. Plus its harder to read.

The capital is secure with income bonds but at age 61 you run the risk of inflation and that can actually make them higher in risk than most realise.

In real terms, you would be experiencing the equivalant of a stockmarket crash every 10 years with no hope of recovery.

Lets say you put £20,000 in income bonds. Ten years down the road you will still have £20,000 but it will only have the spending power of around £14,000. Not only that, the income of income bonds will be lower in real terms as well.

They are not the option that they once were and I rarely utilise them nowadays as there are much better options.

benny5

Being in a similar situation what type of investment would you suggest as an alternative. Is there such thing as a safe option i.e. investment protected and inflation proof returns. Or is this expecting too much.

Regards.

dunstonh

Being in a similar situation what type of investment would you suggest as an alternative.

It would breach board rules and be an FSA breach if I was specific.

Is there such thing as a safe option i.e. investment protected and inflation proof returns. Or is this expecting too much.

Assuming we are still talking income and not growth....

Yes. However, guarantees tend to cost money and can make hit the returns. Often a sensible investment spread without any guarantees (apart from perhaps a death guarantee which can be obtained at no cost) can be a good option. Whilst you may see occassional periods when the value goes down, if you are saving 1-1.5% a year in charges, then over a 10 year period that soon adds up and cancel out any bad period.

Risk is not an on/off situation. It's a sliding scale and you dont have to go from no risk to gung ho. You dont have to put all the money in one place (you should never anyway). You can put little bits in to the riskier areas and dip your toes in to the water.

I would say though that you should consider if you need a guarantee or not and when you would need it. When thought through, death and ability to continue an income is often the occassion most are concerned with and that can be achieved with investments.

benny5

Thank you for your reply and apologies if I inadvertently transgressed forum guidelines.

mum2one

Hi
The best bet would be look for a high interesrt account, obviuosly if you tie up the money as a bond they tend to be a higher rate.

dunstonh

Thank you for your reply and apologies if I inadvertently transgressed forum guidelines.

You didnt. However, I would have if I had responded naming what investment to use.

Recommendations such as use a high interest account could actually be the wrong advice. What if the individual is close to the age allowance mark? Use of a savings account could create an age allowance reduction signficantly increasing the tax payable above 20%. What if pension credit is applicable? Again, it could have an impact.

jamesd

High interest savings accounts are likely to be highly inappropriate over the long term. You get to take just 1-3% as income after inflation, depending on the inflation measure you use.

The best options for each person will depend on how much pension and other income there is as well as how large the lump sum is, the tax situation and any inheritance tax planning that is needed.

Here's a Watson Wyatt regional allocation for medium risk level 6, in a tax wrapper:

sector/amount		
UK Fixed Interest	19	
UK Property		22	
UK Equity		25	
North American		9	
European		9	
Japanese		5	
Far East Ex Japan	3	
Emerging Market	Equity	3	
Global Specialist	5	

A lower risk selection could use more fixed interest and property, less of the others, for lower growth and income but less capital value variation year to year. So, you'd buy funds (unit trusts, OEIC's) with that mixture. If you're planning to leave the money invested for many decades to take income from it the risk level is a bit less significant because you only actually lose the capital value if you withdraw the money before the markets have recovered.

You'd also want to think about the best tax wrapper to use. That would depend on your specific circumstances but could be pension, stocks and shares ISA, no tax wrapper or investment bond, for example. Or a mixture, since the ISA one is often a good choice but can only have money moved to it at 7000, soon 7200, a year.

If you're after income only until pensions start, you could also consider buying a fixed term annuity for a few years. This loses you the capital but can be very tax-efficient because much of the income is from your capital, so is tax free. You could also or instead take a bit of the capital each year from the other ways of investing if you need more income initially until pensions start.

benny5

Thanks for the insight. Just convinced myself that this is not one for the financial DIY enthusiast. Fixed up a session with an IFA in the next couple of weeks.

Regards.

Benny.

JONTY_2

Thanks to all of the above, think I'll follow benny5 to an IFA.
regards
Jonty

dunstonh

Remember, when seeing an IFA, we are all different. You need to make sure your IFA is an investment specialist. You don't want to see one that spends most of their time doing mortgages as they may be brilliant on mortgages but their knowledge on investments will not be as strong (i.e. jack of all trades, master of none).

Avoid the salesforces (regional or national). Salesforces (tied or IFA) account for most things that have gone wrong over the years. Sales managers giving pressure along with sales targets and incentives just doesn't sit well with proper financial advice.

When seeking advice, with most investments, the commission option is the same as fees. i.e. a 3% commission is a 3% deduction from your investment. So, make sure you verify remuneration terms in advance. The customer agreed remuneration option is a good way where you agree a fee but have it paid by the commission. Aim for 1.8% with a cap if larger investments. Anything better than that and you are doing well. 3% is the typical maximum so remember that.

Also ask about servicing and reviews and enquire about the adviser history a bit. Salesforces tend to have high turnover of staff but smaller firms tend to have longer tenure. Get in with the owner/partner/directors and you more or less know they are going to be there for the long term. Plus you tend to find those individuals are the more skilled (generalisation alert as there are exceptions).

And finally, ask to see the research. If no research is available or forthcoming, then you should be on guard.