Money: For a cautious investor, the advice is a spread with the chance of growth

Click to follow
The Independent Culture
NIGEL CAME to see me the other day to ask for some investment advice. He is 66 and retired, with a good occupational pension scheme that increases in line with the retail price index each and every year. He has additional income from the state and another pension which means that his income is sufficient for his requirements.

He has no mortgage on his property and about pounds 75,000 to invest, all of which is in cash. This investment leaves him sufficient cash in building societies and a Tessa for short-term needs and emergencies. The pounds 75,000 he can comfortably tie up for a five-year-plus period.

He has never invested in the stock market before. Nigel has some privatisation shares, but that is all. However, he feels that it is time that he looked at diversifying his investments.

Nigel is not pleased with the interest rate he is getting on his building society money, but is cautious about stock market investment. He needs advice on how to maximise his capital for capital growth without taking extraordinary risks, but still giving the money a chance to grow. He might need some income in the future, or chunks of capital.

As this is Nigel's first foray into the investment field, it is most important that the investments should be spread and different companies used where their products are competitive.

Our solution was to advise Nigel on a spread of investments that would provide him with a good chance of capital growth and from which he could take income without problem if his circumstances were to change in the future.

As Nigel has no personal equity plans (PEPs) at all this was a first consideration. We did not want to take high risks so we recommended a corporate bond PEP.

The recommendation for his investments was as follows:

Scottish Mutual offshore bond - pounds 15,000

Prudential with-profits bond - pounds 20,000

M&G PEP - pounds 6,000

Series of Unit Trusts - pounds 34,000

Total - pounds 75,000

Nigel is a borderline higher-rate taxpayer and the income that he had been receiving from his deposit accounts was tipping him over into a higher- rate tax bracket.

Therefore a PEP was a first consideration, as any income he would take from this and indeed any capital ,would be tax-free. A corporate bond PEP limits the risk exposure, although there is a degree of risk with this type of investment. In spite of being a "low risk" PEP, the importance of good management is as important as with higher-risk PEPs. Performance can vary dramatically, so this was taken into consideration.

The offshore bond sounds a little exotic, but in reality this type of investment is a legitimate choice. From a risk exposure point of view, the Scottish Mutual Safety Plus fund carries a quarterly underpinning, whereby only a portion of the investment is exposed to risk and the potential upside is not over-sacrificed for this type of security.

The advantage of the offshore bond is that Nigel can choose exactly when he brings money into this country, such as when his tax rate is at the basic rate rather than at 40 per cent. This puts Nigel in control of the tax he pays.

A with-profits bond is a cautious type of investment where bonuses would only be at risk if Nigel were to encash the investment at a time when conditions were adverse. What is important is to choose a good provider, such as Prudential, which has demonstrated a good track record and the ability to continue to declare reasonable bonuses. Basic-rate taxpayers pay no tax on encashment (providing the gain does not tip them over the higher-rate threshold.)

Higher-rate taxpayers benefit from being able to take 5 per cent withdrawals for a 20-year period on which they pay no tax. As part of Nigel's income does not increase, it is likely that in the future he will be comfortably out of higher-rate tax.

A series of unit trusts was spread between various companies such as Fidelity, Perpetual and Gartmore and was also spread geographically using the companies concerned in areas where they are competitive.

This was the most risky part of Nigel's portfolio. Some of the investments were in trackers and others in actively managed funds, again to give a further spread. By restricting investments to the UK only, Nigel would lose out on any growth worldwide.

The unit trusts also meant that Nigel could use his capital gains tax allowance of pounds 6,800, which up until now he has not been using.

Thus we have created for Nigel a tax-efficient portfolio without overly risking his investments. Should one area of investment let him down, he has sufficient other investments to be able to weather the storms.

Should Nigel's circumstances change in the future, he would be able to take a regular income from many of the investments that we have advised. In addition, the investments are completely liquid in the event that he wished to realise them, although we would recommend for any of these types of investments a five-year view, which accorded with Nigel's wishes.

Amanda Davidson is a partner at Holden Meehan, independent financial advisers (0171 6921700).

Comments