Investment income projection

oceanblue_3

MJSW, this is an extract from one of your posts...

"Quote:
Originally Posted by oceanblue
When you reach age 65, your personal allowance increases from £4,895.00 to £7,090.00. However, if your total gross income exceeds £19,500.00, then you lose £1.00 of your age allowance for each £2.00 of income in excess of £19,500.00. Income generated by earnings, pensions, savings interest, and share dividends, etc. all count towards this £19,500.00.

I agree with all of that, but the effective rate on dividends is still 11%. Lets say you are right on the limit where the Age Allowance starts to reduce (£19500), and lets assume the £19500 is all pension income. You then receive an additional £100 in gross dividends. The extra tax on the dividends is zero, as it is covered by the tax credit. The Age Allowance is also then reduced by £50, which results in total additional tax of £50 x 22% = £11."

You see, we agree on this: explicit income in excess of the income limit increases the tax burden.

Now then, show me where I have said that those dividends themselves would suffer additional tax.

EdInvestor

dunstonh wrote:

If investment funds is the area being invested in...

Err, it's not.This thread is comparing an investment bond with direct investment in shares, hence the ongoing accompanying discussion about the tax treatment of dividends.

I also think that growth of 8.47% since 29th June could not be considered pathetic. And thats in a portfolio weighted towards the cautious side. Many would be happy getting that in a year, let alone 2 months. Indeed, its not far off your 9% p.a. figure in a fraction of the time.

But according to your earlier figures, the bond has to to produce at least a 6% return every year for 10 years without exception, in order simply to preserve the capital - before we even start thinking about making any money in addition to the 5% 'income'.

Six weeks in that scheme of things is just a blip.

dunstonh

Err, it's not.This thread is comparing an investment bond with direct investment in shares, hence the ongoing accompanying discussion about the tax treatment of dividends.

No its not. There are multiple threads within this thread.

Quote:
I also think that growth of 8.47% since 29th June could not be considered pathetic. And thats in a portfolio weighted towards the cautious side. Many would be happy getting that in a year, let alone 2 months. Indeed, its not far off your 9% p.a. figure in a fraction of the time.


But according to your earlier figures, the bond has to to produce at least a 6% return every year for 10 years without exception, in order simply to preserve the capital - before we even start thinking about making any money in addition to the 5% 'income'.

Six weeks in that scheme of things is just a blip.

What is the difference with that and other investments? It can grow at 20%, it can grow at 2%, it can make a loss. Exactly the same as everything else.

6 weeks is a short time but it is there to highlight how wrong the comments that these bonds make no money is.

I dont live in Eds world where stockmarkets always go up. If you can come up with a product that is guaranteed to provide 5% income a year and increase periodically, then i would be interested. However, you have always failed to answer that same question when its been put to you by a number of other contributers. Indeed, there is a product that can do that but lets not go there on this thread.

The examples i actually quoted showed growth at 6% and with 5% withdrawn a year. Why should it surprise you that if you only get 6% and draw out 5% that the remaining growth is quite small?

cheerfulcat

whiteflag wrote:

Cheerfulcat

Please can you provide evidence to back up your last statement

Thanks

Hi, whiteflag,

Sorry, despite spending the best part of the morning searching the web, I can't find anything which explicitly sets out the extra charges levied by the lifecos. I'm going by the charges listed in the paperwork associated with my bond. See my answer to

dunstonh -

Seeing as it is very easy to see reductions in yield much lower than unit trusts or OEIC funds (using the same funds), your statement is incorrect.

The extra charges were brought to my attention by the IFA in the key features document. Specifically, " it should be noted that the performance of the (lifeco) fund will not match that of the underlying investment due to (lifeco) fund charges, taxation adjustments and the (lifeco) investment process."


If you look at the insurers' funds performance tables, you can see that they regularly underperform the underlying funds. This can only be due to the extra charges ( going by the information given to me, the charges on the funds within the wrapper are up to 0.4% greater than outside it).

Also, you seem to misunderstand the tax workings of the bond as it can easily be used to avoid tax and not defer it. A higher rate taxpayer who will be a basic rate tax payer at a later date can use it to avoid higher rate tax. Bonds are also used in IHT planning in conjunction with trusts.

As I understand it - and please put me right if this is incorrect - the tax is paid within the fund and the investor effectively gets a 20% tax credit. I can see where, with some planning, someone with a high earned income would benefit but, given the colossal charges involved and the consequent reduction in returns, I doubt that an investment bond is really of any use to a basic rate taxpayer.

Cheerfulcat

dunstonh

Let me provide you a real world example then. For simplicity lets pick one fund. As i used it before in an example, i will use it again as it saves me looking everything up again.

100k in Norwich Union property fund purchased through Fidelity Funds network after 10 years and at 6% p.a. growth would be:

£147,000 with full commission taken by advisor (a reduction in yield of 2%)
£152,000 with nil commission taken by advisor (a reduction in yield of 1.7%)

Purchase the same fund through a bond
£163,000 with full commission taken by advisor (a reduction in yield of 1%)
£174,000 with nil commission taken by advisor (a reduction in yield of 0.3%).

The taxation within the fund is a little higher on the bond meaning the Unit Trust would come in better ignoring charges but look at the difference in charges.

So where are these colossal charges on the bond?

whiteflag_3

Hello cheerfulcat

Sorry, despite spending the best part of the morning searching the web, I can't find anything which explicitly sets out the extra charges levied by the lifecos

Given your statement above how can you go on to mention the "colossal charges" on investment bonds. Have you considered that the fact that you cant find any evidence of higher charges might mean that not all life companies do charge extra. They might for example of negotiated bulk discount for their investors.

You should be able to back up your claims or investors looking for advice on this site will, I fear become even more confused.

whiteflag_3

Hello cheerfulcat

Sorry, despite spending the best part of the morning searching the web, I can't find anything which explicitly sets out the extra charges levied by the lifecos

Given your statement above how can you go on to mention the "colossal charges" on investment bonds. Have you considered that the fact that you cant find any evidence of higher charges might mean that not all life companies do charge extra. They might for example of negotiated bulk discount for their investors.

You should be able to back up your claims or investors looking for advice on this site will, I fear become even more confused.

cheerfulcat

Hello, whiteflag, dunstonh,

What I mean is that I can't find a general list of charges online which you will find acceptable - I have only the list of charges specific to my particular investment bond and, as I said, within the bond they are a good bit higher than outside; as much as 0.4% ( to me, 0.4% on top of already hefty charges is colossal ). There are the FSA comparative tables, of course, but you don't seem to like those. There is also the performance table at the back of Money Management which shows quite clearly the underperformance of insurance funds compared to their underlying funds.

Cheerfulcat

dunstonh

Perhaps the issue here is that you are looking at legacy bonds rather than modern bonds. The charges on old legacy bonds used to be very heavy. Although there are still providers that do those old terms there are sufficient modern charged plans to allow us to use those as a good example.

Many people are still on old style deposit accounts earning 1% if they are lucky. We dont call savings accounts rubbish because of that. We just call those ones rubbish. The same applies to bonds and almost any other product class.

whiteflag_3

Cheerfulcat

Hope you dont think its rude to ask, but who is your bond with?

There are some companies that have "double charging", but then there are sometimes loyalty bonuses, extra allocations etc that have the effect of bringing down the overall charges. Did you benefit from any additional incentives?.

While you are correct in pointing out the extra charges on your bond, I think dunstonh's figures for Norwich Union are relevant.