Investment Bonds v Savings Account

N_Chedgrave

Having taken early retirement in 98', we have always been careful with our savings. These have been kept in a savings account with one of the big supermarkets as at the time it was one of the top rates of interest, I know this is not now the case.

Our advisor at our building society has suggested a fixed rate savings bond for 1 year paying a monthly income. Sounds good.

Due to sickness, we have just seen a different advisor. He realises we are extremely cautious savers who normally do not take any risk, but has suggested a medium risk investment bond. This would provide a useful income as and when we needed it and would allow the money to keep it's real value over 5? years.

Is now a good time to take an investment bond out?

Is now a good time to change our habits of saving.

We have enjoyed worry free saving...at 61 years of age, should I begin to worry about saving?

dunstonh

Is now a good time to take an investment bond out?

An investment bond is just a tax wrapper. You can put different types of investment inside that tax wrapper that range from cash deposits, gilts and fixed interest, property, uk stockmarket to emerging markets and specialist. There is no such thing as a good time or bad time to use a tax wrapper. Other tax wrappers are ISA, Pensions and unit trusts (technically not a wrapper as they are the unwrapped version and have default taxation applied to them but lets not go there now)

The bond tax wrapper is a minority tax wrapper. Its ideal for higher rate taxpayers and larger investments (100k plus I would put a minimum on nowadays but with an increasing benefit as it gets higher). It is oversold. Especially by tied agents (bank and building societies) and low skilled advisers.

I have some issues with the advice:

He realises we are extremely cautious .......but has suggested a medium risk

Does he really want to recommend a medium risk spread when you are cautious? Wouldnt it be better to recommend a cautious spread?

Our advisor at our building society has suggested a fixed rate savings bond for 1 year paying a monthly income. Sounds good.

Why does that sound good. You will get taxable interest and your capital will be lower by around 3-4% in real terms due to inflation. Do that every year for 10 years and you would have lost more money in real terms than a typical stockmarket crash.
Investments and savings are different. If you are using the money to supplement your income then you should be looking to utilise investments. That means taking on some risk. However, risk is not on or off. Its a sliding scale and you dont need to jump in at the deep end and go all gung ho. You can dip your toes in at the low risk end and get a decent cautious spread that aims to pay you an income and obtain some capital growth over the long term which you can use to keep up with inflation.

If you are only seeing bank/building society advisers then you need to be aware that they are not real financial advisers (indeed, the FSA has proposed that from 2009 they will not be able to use the adviser tag any more). They are insurance reps with limited scope to give proper investment advice and can only offer a product range of 10-15 products/funds. Most of which are done on maximum commission basis and/or more expensive than the whole of market version.

See an IFA and make sure its an investment IFA (no point seeing a mortgage IFA who only spends 5% of their time doing investments).

Footsie_2

You have said yourself that you are a very cautious investor so this is the best course of action, if he is suggesting medium risk he isn't listening to what you are saying. Of course he will probably show you fancy graphs and provide you with figures of what you could achieve but, as suggested in the title, medium risk investments do hold a risk and with current market volatility it's not a place for a cautious investor. Only invest it in medium risk investments if you are willing to make a loss, it's not a guarantee either way so expect the worse and hope to be surpised!

N_Chedgrave

Wow! Quick replies...good advice!

Will try and find a good IFA locally.

Many thanks.

MrMicawber_2

Is it worth taking out an investment bond as a basic rate tax payer now that CGT is reduced to 18% (from 2008/2009 anyway) unless you are using it for trusts (where I understand you can pay less tax on income than for other trusts) or to help maximise your age allowance? It does seem to me that they can be a license to print money for unscrupulous 'advisors'. Even as a higher rate tax payer you need to be careful about how you plan using the bond or you may end up paying more tax than you wish - so seeing a specialist IFA is important.

dunstonh

Is it worth taking out an investment bond as a basic rate tax payer now that CGT is reduced to 18% (from 2008/2009 anyway) unless you are using it for trusts (where I understand you can pay less tax on income than for other trusts) or to help maximise your age allowance?

Potentially it is still ok providing there is a reason.

1 - Charges - charges can be lower on an investment bond (they can be higher too so it only applies to lower cost versions)
2 - If large amount - if the fund is going into higher yield investments which could take you into higher rate if on unit trusts, then using the bond for some of the money could still be justifiable.
3 - Age allowance - Bonds could still be used to protect this but it would only work with a low cost version
4 - trusts - not really got a lot of choice and you need to use a bond in most cases
5 - convenience - some people just dont like having to fill in a tax return each year and having to buy and sell units each year to use their CGT allowance. They "may" see the bond as a convenience that is worth the extra cost.
6 - pension credit and long term care - investment bonds are not included in the means test when no income is taken (and transaction was done in advance of known need).
7 - Offshore bonds now look better than onshore for larger amounts. Although offshore bonds can look expensive for smaller amounts as the charges are often fixed cost and not necessarily percentage based.

The industry is lobbying the treasury still regarding the change and the treasury has admitted it has created an inbalance it had not intended so there is still the possiblity of a change.

However, I would go as far to say that anyone who is investing money who is being recommended an investment bond for investments under £100k from this point on should really be on guard.

baby_boomer

Some of the advantages of these bonds should have been scrapped years ago. I'm surprised it's taken so long for them to be properly scrutinised.

Why on earth should they escape consideration for age allowance or care allowances or pension credits ?

EdInvestor

N_Chedgrave wrote: »

Due to sickness, we have just seen a different advisor. He realises we are extremely cautious savers who normally do not take any risk, but has suggested a medium risk investment bond.

The mind boggles.At a time when the market is at its most volatile for 50 years, this character suggests to people who never take any risks that they might like to enjoy a little fun and excitement :rolleyes:

...at 61 years of age, should I begin to worry about saving?

If you decide you'd like to, your timing is spot on.

Fergie73

If you're a cautious investor, I'd say stick with the savings account. I'm in my thirties, and wouldn't have classed myself as all that cautious (a bit maybe). An IFA advised both me and my mother to go with a bond, and - like yours - he advised us to put it in medium risk. I got nervous and put about half of it into a bank account last year, and am now totally regretting not just putting the whole amount there.

You say he told you a medium risk investment bond would provide a useful income as and when we needed it and would allow the money to keep it's real value over 5? years. This is not necessarily true, certainly not with medium risk, but not even with cautious. The main difference between a bank account and other types of funds is that with the bank account you know exactly what you have and exactly how it will grow. It might not be spectacular growth, but you have that certainty.

Other types of investment, however, can go down, and advisors never seem to say this anymore - mine more or less guaranteed better growth than a bank account. But my cautious funds have lost a lot over the past few months, so you have to take into account how you'd feel if that happened. If you would feel really depressed or worried by losing money, or by stockmarket turmoil, the bank is better. For peace of mind, the bank is better.

Also, although the stock market has just lost a lot, all the predictions right now are that it could well get a lot worse. If you've been in cash all your life, I personally wouldn't switch now, as the whole financial sector looks more shaky than it has in years. We've had a few years of boom, and now appear to be heading for a few harder years. If you've spent all your life doing one thing, then switch and lose money, that would feel horrible, I imagine.

IFAs, even though they're independent seem to be selling things too, I think. They get commission. So they will never advise you to stick with a bank account, I don't think. But that may well be the best thing for you. Listen to them, by all means, and see what they can offer, but don't let them rail-road you into something that might not be right. Is the chance of a higher gain worth the risk of losing money, to you? Is there a safe fund they can use, like cash, fixed interest or gilts? (although even these have been losing money in my bond recently - not sure how). Is there a major tax benefit that might off-set the risk or worry?

All I really know is that I would have been far better in a bank account last year! This year, who knows? That's what worries me - I'd rather have that certainty.

dunstonh

baby_boomer wrote: »

Some of the advantages of these bonds should have been scrapped years ago. I'm surprised it's taken so long for them to be properly scrutinised.

Why on earth should they escape consideration for age allowance or care allowances or pension credits ?

The UK has far too many tax wrappers.

It would be so much easier just to scrap the lot and have just the one.

IFAs, even though they're independent seem to be selling things too, I think. They get commission. So they will never advise you to stick with a bank account, I don't think. But that may well be the best thing for you.

Not correct. IFAs are one of the biggest sellers of NS Certs. Not a penny paid in commision. Cash ISAs are another.

Fergie73

Not correct. IFAs are one of the biggest sellers of NS Certs.

I've obviously been using the wrong ones