Midweek Money: The Fixers: Power of ten
Wednesday 30 December 1998
Ten per cent income is a bit of a magic figure and a level of income that most investors have been used to for a number of years. With interest rates falling, many clients face a bit of a shock when looking to reinvest their money.
"What I am looking for," said Ken Ferguson, "is a product that will pay me 10 per cent net income each year with little risk to the capital."
"I am sorry, but I am going to have to disappoint you," I said. "That rate of return on that type of product simply does not exist anymore."
Ken said that he had never considered how the falling bank rate would affect some investment products. "Unfortunately," I explained, "they are all interlinked to a greater or lesser degree."
"So what options are open if there is not an identical product for me to go back to?" Ken asked.
I said: "Like all investment decisions, generating income is a question of risk versus return. Take risk-free investments with building societies. They are unlikely to offer more than 6.5 per cent gross at present, and as you are a taxpayer you will be liable to income tax. Interest rates are likely to fall further, and consequently the return on the building society will also reduce."
"That doesn't sound too attractive," replied Ken. "What about Tessas?"
"Well, they are worth looking at. Although the rates will fluctuate they tend to offer more than a building society, and as it is sensible to keep money in the building society for emergencies it is worth considering putting some of that money in a Tessa. The advantage of the Tessa is that interest is paid tax free.
"If we move slightly up the risk profile, you could consider a with-profit bond, such as the Prudential or Scottish Widows, and these will pay you 5.75 per cent and 6.75 per cent net reversionary bonuses at present. But it's still not as good as you are used to."
"Don't these tie me in for a long time?" enquired Ken.
"To an extent; but you have to realise that they are designed for the longer term - and that has to be at least five years. Historically with- profit bonds have given very comfortable returns; not exciting but very steady and reliable."
Ken Ferguson said that the drop in income from these investments would prove a problem after being used to 10 per cent.
"If you want a higher income the only option is to go further up the risk scale. Perhaps you should consider a corporate bond fund, such as the M&G High Yield Bond which has a gross yield of 7.85 per cent or the Aberdeen Fixed Interest Fund which yields 8.5 per cent gross, both of which can go into a PEP. If you cannot PEP them then obviously you are liable to tax, which brings their returns down to that offered by with- profit bonds."
"Is there nothing that pays 10 per cent or more?" asked Ken.
"There is a class of share issued by split investment trusts which benefit from all of the income that trust generates," I began. "These are really quite high-risk geared investments, meaning that they exaggerate market movements in both an upward and downward direction.
"The new CGU Monthly High Income investment trust is producing over 10 per cent and soon to be launched the Jupiter Enhanced Income investment trust aim to pay 10.25 per cent. gross. They are not the most straightforward investments, and you should limit exposure to a small part of your portfolio."
"So my choices are: accept that I'll get a lower income, or increase my risk?"
"Correct," I said.
After a couple of days to think it over, Ken requested a prudent strategy, and I recommended a diversified selection of investments maximising his tax benefits through Tessas and Corporate Bond PEPs. Like many investors, he has had to lower his expectations of the returns from income investments.
Tim Cockerill is the managing director at Whitechurch Securities, independent financial advisers (0800 374413)
Review: Imaginative storytelling returns with vigourfilm
Bannatyne leaves Dragon's DenTV
Arts & Ents blogs
- 1 Why I'm on the brink of burning my Israeli passport
- 2 War is war: Why I stand with Israel
- 3 L'Oreal cuts ties with Belgium supporter Axelle Despiegelaere after hunting trip photographs
- 4 World Cup 2014: Robin van Persie appears to give his bronze medal to eccentric Netherlands fan moments after being handed it by Sepp Blatter
- 5 Iraq crisis: How Saudi Arabia helped Isis take over the north of the country
Sustained immigration has not harmed Britons' employment, say government advisers
War is war: Why I stand with Israel
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Australia facing international condemnation after turning around Sri Lankans at sea
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
Socialist Worker called to apologise over ‘vile’ article saying Eton schoolboy Horatio Chapple's death is ‘reason to save the polar bears’