The discreet charms of income shares
Chris Whittingslow looks at an alternative to annuities that allows you to have your cake and eat it, too
Wednesday 13 March 1996
A drastic solution is to buy an annuity - drastic because though you earn high income, you pay the heavy price of sacrificing all your capital when you die.
For people who want to leave an inheritance to their children or grandchildren this is not acceptable. So, more often than not, they hold on to the ownership of their capital by keeping it in the building society and put up with lower living standards.
But there is an alternative. It is to buy the "income shares" issued by a kind of investment trust known as a "split level trust". These take the lion's share of all dividends from the investment trust. Dividends are still on an upward trend, unlike interest rates. So they can provide a high income - around 11 per cent at the moment.
Of course, nothing is for nothing and the drawback with income shares is that they may exclude you from any capital growth in the underlying assets of the investment trusts. For someone seeking to build up capital, therefore, income shares are the wrong solution. But for the older person whose priority lies in the present and not in the future, the discreet charms of income shares deserve to be better known.
They can give you just as much income as an annuity without involving the sacrifice of all your capital. They enable you to have your income cake and eat it, too. And, as dividend income grows, you have the possibility of seeing your income grow, too. You won't get the sort of capital growth an equity income fund tends to produce, but you should retain a decent sum to hand on to your family.
And - again in contrast to an annuity - if you change your mind, there is nothing to stop you selling your income shares and either investing in something else or simply spending some of the money.
So how do you buy income shares? In the past the answer was: "With difficulty." For each "split level" investment trust has a fixed life, at the end of which it may be wound up and the money given back to the investors. The price of the shares depends to some extent on how many years of life the trust has left. This effectively made income shares too complicated for most individual investors of average means.
In recent years the problem has been solved by the emergence of unit trusts investing entirely or mainly in a portfolio of income shares. They have transformed income shares from being the preserve of wealthy individuals and financial institutions into an investment which the average person can now consider. By buying in bulk, the fund manager buys a portfolio of income shares at prices not obtainable by the small investor on his own. And he manages them to take account of any changes in market conditions.
Unit trusts based on income shares can also be held in a Personal Equity Plan, which adds tax advantages to the attractions of a high income. The average equity unit trust PEP yields 4 per cent or less, so a pounds l,000 investment would provide a dividend in the first year of pounds 40 - a tax saving of no more than pounds 10 for the average taxpayer and pounds 16 for the top rate taxpayer. By contrast, pounds 1,000 in a unit trust based on income shares and yielding 10 per cent saves you tax of between pounds 25 and pounds 40 a year inside a PEP.
If you invested your full PEP allowance of pounds 6,000 in an income share fund which yielded 10 per cent a year for 10 years, you could hope to have net income over that period of pounds 600 a year, or pounds 6,000 in all. On this the cumulative tax saving, on current rates of income tax, would be between pounds l,200 and pounds 2,400.
You will not be saving any capital gains tax because you won't be making much in the way of capital gains. But, since only a small minority of people ever pay capital gains tax anyway, that is hardly a drawback. On balance, then, unit trusts based on income shares merit investigation by savers who need maximum income right away from modest amounts of capital.
A list of income share providers and a fact sheet is available from the Association of Investment Trust Companies (0171-431 5222).
The writer is investment director of Exeter Fund Managers (01392 412144).
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Barclays's new life insurance heralds a revolution on the high street
How to protect your assets if the stock markets begin to head south again
Head across the Irish Sea for bargain houses
Bargain Hunter: Timing is everything in making big savings on beer, wine and whisky
Mark Dampier: Don't listen to stock market doom-mongers - sit back and enjoy the sun
- 1 Israel-Gaza conflict: 'When Genocide is Permissible' article removed from The Times of Israel website
- 2 Pope Francis issues top 10 tips for happiness
- 3 Disney heiress Abigail disowns her share of family profits in West Bank company
- 4 The secret report that helps Israel hide facts
- 5 Israel's propaganda machine is finally starting to misfire
Land for gas: Merkel and Putin discussed secret deal could end Ukraine crisis
Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
Richard Dawkins tweets: 'Date rape is bad, stranger rape is worse'
Putin is 'thuggish, dishonest and reckless', says British ambassador to US
Boozy, ignorant, intolerant, but very polite – Britain as others see us
A new Russian revolution: The cracks are starting to appear in Putin’s Kremlin power bloc
- < Previous
- Next >
iJobs Money & Business
£300 - £350 per day: Orgtel: Financial Analyst, Forecasting, Halifax, Banking,...
£500 per day: Orgtel: Business Architect - Banking - Bristol - £500 per day A...
£200 - £500 per day + competitive: Orgtel: I am currently working on a large p...
£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...
Day In a Page
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000