by Arch Financial Planning Limited
IDEAS
FOR INCOME
Retired people can be heavily reliant on the income from their investments to support their standard of living. Many semi-retired people are also using income from investments to top-up their earned income. The Bank of England has announced a 0.25% cut in interest rates this week so most variable interest rate deposit accounts will shortly be paying a reduced level of income.
We would like to list 10 simple ideas for increasing your investment income in the hope that one might be of interest and then mention one specific investment - the Keydata Secure Income Bond - which could help make up for the shortfall caused by that interest rate cut. If any of the ideas are of interest please get in touch and we will be happy to explain them further.
(1) Most people use cash investments such as deposit accounts to produce income. These have advantages in terms of ease of access and security but does all of your money need to be readily accessible? If you are a tax payer a higher income can be obtained by investing part of your money in bonds (ie fixed interest investments), or property (ie commercial property), or equities (ie stocks and shares funds targeted to produce a high income) or a combination of these. By using collective investment funds you can invest relatively small amounts in these.
(2) If you are mainly using deposit accounts to produce your income then you should at least be using postal, telephone or internet accounts rather than those available on the high street. The difference in return can be quite noticeable.
(3) Do not overlook the importance of capital growth for producing tax efficient ‘income’. Most people do not pay capital gains tax. Why not set up some of your money in growth investments and then use the annual growth to provide additional ‘tax free’ income? There are special schemes that do this automatically for you.
(4) Be careful that you do not pay tax unnecessarily. If you are investing as a couple, make sure where possible that income is received by the lowest tax payer of you both. Be especially careful if you are aged over 65 and one or both of you has an income in excess of £19,500. You could be paying tax at 33% without realising it.
(5) Particularly if you are a higher rate tax payer, or you have a large pension income, you can make use of life assurance bonds to provide additional income on which your tax is deferred and may never be due.
(6) If you or your partner is not a tax payer then you should not ignore the advantages of using offshore investments. Of course you need to be even more careful with these but an offshore life assurance bond, for example, now provides the same protection to a UK investor as the onshore variety and the tax can be quite a lot less. Many investors have started investing some of their money into commercial property funds. Again, a non tax payer can receive the twice yearly dividends without deduction of tax by using a fund based in Dublin rather than London.
(7) It goes without saying that you should make the most of your annual ISA allowance. However, many people put up to £3,000 into a Mini Cash ISA and forget the other £4,000 that can be put into a Mini Stocks and Shares ISA. It is important to note that this additional £4,000 does not have to be invested in stocks and shares but could be invested in lower risk bonds or distribution bonds (a mixture of bonds and equities).
(8) Do not neglect your PEPs just because they have been around for a long time. You may have a large fund in your PEPs consisting mainly of UK equities. By switching these (still within the PEP) to bonds or distribution funds you could have a higher income which is paid in a more tax efficient way. This also applies to funds held in ISAs. Dividends received by PEPs and ISAs suffer a 10% tax charge that cannot be reclaimed but interest on bonds received by PEPs and ISAs reaches you completely tax free.
(9) Get an IFA (preferably us!) to review any investment funds that you have held for a while. Funds that were good performers a few years ago may be costing you money now compared to the returns from similar better performing funds and should be moved elsewhere.
(10) If you are finding it hard to live on the income produced by, say, £100,000 then put £5,000 in National Savings Premium Bonds. You will not notice the reduction in income but the odd £50 of winnings from time to time will make you feel a lot better!
The Keydata Secure Income Bond
This is a 5 year term investment which has the option of paying investors 7.5% gross annual income, 1.875% gross quarterly income or 43.5% gross growth. A basic rate tax payer would pay 20% tax on these amounts and a higher rate tax payer would pay 40%. The Bond is also structured with the aim of repaying your capital at maturity, though a full capital return is not guaranteed. It is possible for you to get back less than your original investment at the end of the term, or if you cash in your investment early.
Naturally the high level of income should make you cautious. This is a Structured Capital-at-risk Product (SCARP). The FSA defines SCARPs as ‘products that provide a specified level of income or growth over a fixed period but do not guarantee the return of the initial capital.’ Before anyone invests through us we will provide them with a copy of the FSA Factsheet Capital-at-risk products.
The interesting part about this product is that it is not linked to shares or share indices. Your capital is invested in a combination of cash and portfolios of insurance contracts. The income is created through interest on the cash holding and the sales or maturities of the insurance contracts. The insurance contracts within the plan are issued by financial institutions rated at least ‘A’ by Standard & Poor’s.
Of course, this investment cannot be compared with a deposit account but neither is the risk unacceptably high for a large number of income seeking investors. The structure of the bond puts it at a somewhat lower risk than investments in high yield corporate bonds or equities. Particularly if you keep your investment into this Bond as a small part of your overall investments it could be just the ticket.
Keydata Investment Services Limited was formed in 2001 and has attracted over £800m of investments, establishing itself as one of the leading providers of structured investment products in the UK. Keydata has launched over 30 structured investment products and has over 52,000 investors. It provides third party administrative support services for many of the UK’s leading fund and asset managers including Henderson Global Investors, Mellon Global Investment, New Star, Premier Fund Managers, Skandia and a number of building societies such as Leeds & Holbeck, Cheshire and Staffordshire. Keydata has a reputation for innovation and integrity and is committed to producing investments offering attractive returns within clearly defined risk parameters. Keydata is regulated by the FSA and has offices in London, Reading and Glasgow.
If you would like to receive a brochure on the Keydata Secure Income Bond or to discuss whether this might be suitable for you and you have an Arch adviser then please contact him or her, otherwise email direct@arch-fp.co.uk or telephone 01483 204600. Please note that this offer must close on 16 September 2005.
IT IS IMPORTANT TO NOTE THAT YOU SHOULD NOT ENTER INTO ANY INVESTMENT ON THE STRENGTH OF THE EXTREMELY LIMITED INFORMATION GIVEN HERE. The information given is based on our understanding of the product and it is not intended to replace your own reading of the literature provided by the product provider. Please contact us and we will provide you will full details of the investment prior to making any decision to invest.
In the unlikely event of the Bond’s issuer being unable to meet its financial obligations, your investment could be at risk. Returns from the insurance contracts are at risk in the event of any of the institutions defaulting on their financial obligations, if the insurance companies issuing the insurance contracts default on their obligations or if factors change which affect the rate at which insurance contracts mature. If you realise your investment prior to the Bond maturity date, the price at which you are able to sell your investment in the market may be less than the amount you originally invested. Your investment will be subject to charges for early exits. The levels and basis of taxation and reliefs from taxation can change at any time. The value of any tax reliefs depends on individual circumstances. Tax assumptions are based on our understanding of current legislation and practice and these may change in the future. Past performance is not an indication of future performance and should not be used to assess the risks associated with this investment.
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Arch Financial Planning Limited
Arch
House, Collins Court, 39 High Street, Cranleigh, Surrey GU6 8AS
Tel: 01483 204600, Fax: 01483 204611
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