Investment income projection

EdInvestor

The structure of these investment bonds seems to me to make it virtually impossible to make any money in today's markets, and very difficult indeed to come out over 10 years without a loss.

Take a 25k bond taken out over 10 years ( a typical purchase with the tax free cash from a 100k pension fund).

Looking at the FSA tables on investment bonds, we see the investment will incur charges of average around 5k over the life of the bond.
[https://www.fsa.gov.uk/tables]

Then the investor will withdraw the capital (possibly thinking it is income) at 5% pa, adding up to a total of 12,500 over the 10 years.After deducting the charges, this leaves only 7,500 of the original capital left.

Err, how is this large loss to be avoided without taking significant risks not normally associated with the "cautious" or even "medium" risk category of investor?

cheerfulcat

dunstonh wrote:

Next you will be comparing corporate bonds with James bond because they both have bond in the name.

It is the banks and insurance companies who are to blame for the confusion, not Edinvestor. A bond is a loan to a company or a government. Product providers have hijacked the term ( I suspect because it sounds nice and safe and professional ) and applied it to various of their schemes. When used in this way the word " bond " is meaningless and could indeed apply equally to 007 and my savings account.

MJSW

oceanblue wrote:

MJSW, I note that you concur with the assertion that more tax would be due - thank you.

Thank you??? I have stated in every single post I've made on the subject, apart from the one to Ed above, that there could be extra tax could be up to 11% of the dividends received, so I'm not sure why you've suddenly decided to thank me for it now?

The way you are stating this implies in some way that you think I've previously been claiming there wasn't any more tax due, which has never been my position.

In brodev's case if he put the £200,000 in an investment bond, the reduction in yield figure quoted by dunstonh is 0.6%. The increased tax by owning shares directly would be at most 0.24% of the investment, or nil if he puts them in the name of his wife, as we are told she has minimal income of her own.

oceanblue wrote:

It has never been my contention that dividend income in excess of the Income Limit For Age Allowances of £19,500.00 would attract a higher tax charge on the dividends themselves. My point has always been that any income in excess of this limit would cause some of the income already taxed at 22% to suffer an additional tax burden.

Yes, and your 'point' always has been, and still is, entirely wrong! The extra dividends do not cause any income already taxed at 22% to suffer any additional tax burden. The reduction in Age Allowance causes some of the pension income previously taxed at 0% to be taxed at 22% (on a sum equal to half of the dividends) . The pension income which was originally taxed at 22% remains taxed at 22% even when the dividends have been received. Nothing is being charged at 33% - the actual rate applying to the pension income is at most 22%, and the marginal rate on the additional dividend income remains at most 11%.

I'm still puzzled as to exactly what 'point' you are trying to make? In a nutshell, you seem to be arguing that the the dividends cause some of the pension income to be taxed at 33% rather than 22%, whereas I'm saying that the dividend produces an effective increase in tax at a rate of 11%. Either way, the practical impact on the investor of our two positions is absolutely identical, namely that the additional tax on receiving additional dividends is at most 11% tax of the additional dividends (up to £482.90). Which is exactly as I stated in my first post on the subject, and which both you and dunstonh categorically stated was wrong. The 33% figure you are inventing in this scenario is a complete irrelevance to the investor - the most he will pay on the additional dividends is 11%, and it could be less.

MJSW

dunstonh wrote:

I dont think you would find a single provider that calls it income. You will see it referred to as withdrawal.

Sorry, but that is not the case at all. Here are a few quotes from the Norwich Union investment bond brochure which you yourself provided a link to on the first page of this thread!

1) "A bond lets you use your money to give you growth, provide an income or even a combination of the two."
2) "You can move your money from fund to fund, perhaps changing from a growth fund to one that provides you with income."
3) "If you want to, you can take a regular income or take one-off payments from your bond .."
4) "By doing this, they can choose a fund that provides them a regular income and also aims to provide steady growth."
5) "... at the moment Harry is relying on the income produced by this bond to top up his pension."
6) "If you decide to take an income from Portfolio, it's ...."
7) "When you decide the level of income you take, you should take into consideration your tax position."


Overall, there are 22 mentions of the word "income" in the document. There are only 2 uses of the word "withdrawal"! Have you actually read the brochures of the products you are proving links to?

You are even contadicting yourself within this thread. You are now saying: "If you set up a regular withdrawal from your bank account, you dont class that as income. Why should it be thought of any differently with a bond?.

On page 1 of this thread, you said: "The more you take out as income, the less the fund is likely to increase. You may want to decide the income on an annual basis ....".

It's no wonder there is confusion about this if an IFA uses the terms income and capital interchangably, and Norwich Union call them income but you then categorically state "Its withdrawal of capital (upto 5% p.a.)". I think the reality is that in most cases the 5% withdrawals will effectively be a combination of both income and capital. If the income from the underlying investments less the charges is less than the amount withdrawn, then the excess is effectively coming from the capital . If the income from the underlying investments less charges is more than the withdrawals, then effectively it is all coming from the income.

dunstonh

The structure of these investment bonds seems to me to make it virtually impossible to make any money in today's markets, and very difficult indeed to come out over 10 years without a loss.

My goodness. A couple of days ago, you didnt know the taxation of the product, you didnt know the charges and today its clear you do not know the fund availability. One fund you often mention, Fidelity special situations, is present in many bonds. The modern investment bonds have a range of funds similar to the fund supermarkets for ISAs and unit trusts. With the charges, often being lower on the bonds than the unit trusts, how on earth can you say its impossible to make money on bonds?

Looking at the FSA tables on investment bonds, we see the investment will incur charges of average around 5k over the life of the bond.

You constantly refer to FSA tables that are basically no indication of real world charges. The FSA themselves published figures which have to appear on IDD/Menu documents that show that most people do not pay the default charges on the bond but get them much cheaper. The FSA tables show the maximum on default fund. The reality is that most people get them much cheaper.

You also forget to compare them with unit trust and Oeic funds where the differences would show some funds more expensive, some funds cheaper (on like for like terms). However, on the whole, not much difference.

Then the investor will withdraw the capital (possibly thinking it is income) at 5% pa, adding up to a total of 12,500 over the 10 years.After deducting the charges, this leaves only 7,500 of the original capital left.

Even you cannot be that stupid. If you draw out more than it makes, then the capital will drop. That applies to any product there is. Putting those figures into a proper projection calculator using 6% as the growth rate, after 10 years, the lowest was 23,500 and the highest was 26,600. That was on full commission terms. Going with what the FSA say the average is, you are looking at 28,000.

Where on earth did you get your figures? ahh, yes you didnt include growth. You withdrew 5% a year and assumed zero growth and used a charge which doesnt match what is available in the real world but exists in Eds world.

You need to get something clear. An investment bond is just an alternative form of tax wrapper to an ISA, OEIC, Unit Trust, Pension etc. All the funds which are available on ISAs and OEICs/UTs are available in a bond. The charging structures are much the same as well. Improved in some, worse in others.

Your statement has basically said, that no investment area in the world can make you money.

oceanblue_3

MJSW says this..."Thank you??? I have stated in every single post I've made on the subject, apart from the one to Ed above, that there could be extra tax could be up to 11% of the dividends received, so I'm not sure why you've suddenly decided to thank me for it now?"
I am simply stating that an investment in an investment bond would lead to there being less income tax due; your calculations demonstrated this perfectly.

MJSW goes on to say this..."The way you are stating this implies in some way that you think I've previously been claiming there wasn't any more tax due, which has never been my position."
I think we'll have to agree to disagree here: both dunstonh and I were convinced that your position on this was that no more tax would be due.

We are quibbling over semantics here..."The extra dividends do not cause any income already taxed at 22% to suffer any additional tax burden. The reduction in Age Allowance causes some of the pension income previously taxed at 0% to be taxed at 22% (on a sum equal to half of the dividends). The pension income which was originally taxed at 22% remains taxed at 22% even when the dividends have been received. Nothing is being charged at 33% - the actual rate applying to the pension income is at most 22%, and the marginal rate on the additional dividend income remains at most 11%."........the effect upon the investor's tax position is exactly the same. If you check my posts, you'll see that I referred to it as an "equivalent" rate of 33%; I did not suggest that an actual rate of 33% was being charged.

In any event, this discussion is veering away from the point raised by the brodev: how to generate "income" from capital. To expect the solution to reside solely with the use of investment bonds, or with the use of a porfolio of high-yielding UK equities, is naive in the extreme. Nevertheless, these threads follow a nauseatingly familiar path:

1)hopeful poster looks for suggestions

2) regular amateurs post their pet mantras

3) regular professionals seek to redress the balance

4) we all become "particle clerks" as we argue the toss over peripheral issues.

The fact is this - brodev has not given us enough information about his own circumstances to enable us to do more than sketch in a couple of possibilties. He and his wife need to speak to a qualified adviser.

EdInvestor

dunstonh wrote:

If you draw out more than it makes, then the capital will drop. That applies to any product there is. Putting those figures into a proper projection calculator using 6% as the growth rate, after 10 years, the lowest was 23,500 and the highest was 26,600. That was on full commission terms. Going with what the FSA say the average is, you are looking at 28,000.

So you're saying that if the 25k fund grows at 6% each and every year of the 10 years it is invested, then it might be worth between 23.5k and 26.6k when it matures, ie the capital value will be more or less maintained (hopefully)?

I would not call that making money myself. :rolleyes:

What is the probability of any investment in the stockmarket showing growth of at least 6 per cent every single year for 10 years? What risks do you have to take to average that amount?

Do you think it is worth taking this investment risk for an annual "income" of 5%, and no capital growth over 10 years?

This is surely the worst of all worlds: high risk, low reward.:(

MJSW

oceanblue wrote:

I think we'll have to agree to disagree here: both dunstonh and I were convinced that your position on this was that no more tax would be due.

Well if you were both convinced of this, then frankly it doesn't say much for either of your reading and understanding skills! However that much is already clear, as dunstonh seems to be under the impression that there isn't a single provider who calls withdrawals from the bond "income", despite there being frequent uses of "income" in the brochure of the policy he gave a link to.

-From my 1st post "The total additional tax is therefore 11% of the gross dividend."
-From my 2nd post "The effective marginal rate of tax on additional dividend income reducing the Age Allowance is NOT 33%, it is 11%."
-From my 3rd post "I agree with all of that, but the effective rate on dividends is still 11%."
-From my 4th post "Indeed, with a 5% dividend yield the absolute maximum additional tax due to loss of Age Allowance as a percentage of the intial investment is 0.55% of the capital, no matter how big or small the dividend income"
-From my 5th post "The "effective tax charge" due to the Age Allowance Trap on receiving extra dividends for a basic rate taxpayer will never be more than 11%."


I'm not sure how I could have made this any clearer! How on earth do you manage to understand the complex terms and conditions of financial products if you are unable to understand basic English? How were the words "the additional tax is therefore 11%", and similar, able to convince you that I meant "no more tax is due"? I would be highly concerned if you were acting as my IFA!

I am disgusted that rather than just simply admit you are wrong, you are now trying to imply that I've said there couldn't be any more tax. I have never said that, as well you know. Anyone who reads this thread will soon see for themselves how absurd your claim is.

If you check my posts, you'll see that I referred to it as an "equivalent" rate of 33%; I did not suggest that an actual rate of 33% was being charged.

Quite. In referring to an "equivilent rate" of 33% you are completely incorrect. The equivilent rate on additional dividends which reduce the Age Allowance is 11%. You are misleading people by referring to an equivilent rate of 33% in this example. You clearly have an extremely poor grasp of basic tax computations.

He and his wife need to speak to a qualified adviser.

Agreed. And preferably an advisor who can understand English, has a understanding of basic tax issues and has actually read the brochures which he provides links to.

oceanblue_3

MJSW says this...
"How were the words "the additional tax is therefore 11%", and similar, able to convince you that I meant "no more tax is due"?"

In a previous post, he has also said this...
"There is no additional tax on the dividend itself. The only effect therefore is that for each £2 of income falling 'in the trap', £1 of allowances are lost. For a basic rate taxpayer (and that's the only scenario that's relevant here as the Age Allowance doesn't apply to higher rate taxpayers), the worst that can ever happen by receiving £2 extra dividends (gross) is that an additional £1 will become chargeable at 22%."

Now, perhaps, the source of the confusion is becoming more apparent, and I am convinced it is a question of semantics. Clearly, there are different ways of explaining the "Age Allowance Trap" to clients; their chief concern, however, is to receive accurate information regarding its effect on their income - describing it in terms of an "equivalent rate" is both easily understood and, of equal importance, endorsed by The Chartered Insurance Institute. It might not be the way a chartered accountant perceives it, but it is accurate, easily understood, and certainly not misleading.

MJSW

Now, perhaps, the source of the confusion is becoming more apparent, and I am convinced it is a question of semantics.

Well it isn't becoming any more apparent to me! In the extract you have quoted, I said there would be additional tax chargeable on £1 out of the £2 dividend at 22%. It is impossible for anyone to interpet this as saying there would be no further tax, particularly as both the sentence before and the sentence after that extract both referred to the 11%, and every single one of my previous posts had said that the additional tax could be up to 11%. If that's the best you can do to support your ridiculous claims, then I feel sorry for you.

their chief concern, however, is to receive accurate information regarding its effect on their income - describing it in terms of an "equivalent rate" is both easily understood and, of equal importance, endorsed by The Chartered Insurance Institute. It might not be the way a chartered accountant perceives it, but it is accurate, easily understood, and certainly not misleading.

So you think quoting an "equivalent rate" of tax of 33% to clients receiving additional dividend income, when the additional tax they would actually pay is only 11% of the dividend is not misleading?

Any normal person being told that they would suffer equivalent tax at 33% if they received additional dividend income of £4390 would assume they would have an additional tax liability of £1,448.70, rather than the £482.90 it would actually be! How is this "accurate" and "easily understood"?

Do you have link to a the CII definition of "equivilent tax"?