Investing for income

During these difficult economic times, one of the tools available to the Bank of England to stimulate the economy is interest rates. Lower interest rates mean that it is cheaper to borrow money and people have more to spend, hopefully stimulating the economy and reducing the risk of deflation. This is why the Bank of England has aggressively cut them.

If you are an income-seeker, much will come down to your attitude to risk. If you want no or very low risk, you may wish to consider a traditional cash bank account and accept that income levels are likely to remain low for the foreseeable future. However, if you’re further up the risk scale you may wish to consider some of these alternatives.

If you’re willing to take on a slightly higher degree of risk and you need the extra income, you may wish to consider gilts (or gilt-edged stocks), which are bonds issued by the government and pay a fixed rate of interest twice a year. Gilts involve more risk than cash, because there’s a chance the government won’t be able to pay you back. It’s highly unusual for a government to default on a debt or default on the interest payments, so they have been considered safe. But in this current economic climate, this risk increases.

You are not guaranteed to get all your capital back under all circumstances. Not all gilts are bought from the government and held to maturity; some are bought and sold along the way, so there’s a chance for their value, and the value of gilt funds, to rise and fall. There are other types, such as index-linked gilts, which form the largest part of the gilt portfolio after conventional gilts. Here the coupon is related to movements in the Retail Prices Index (RPI) and is linked to inflation.

Corporate bonds
Next along the risk scale if you are looking for a higher yield are corporate bonds. These are issued by companies and have features that are exactly the same as gilts except that, instead of lending money to the government, you’re lending to a company. The risk lies in the fact that companies may go bust and the debt may not be repaid. They have a nominal value (usually £100), which is the amount that will be returned to the investor on a stated future date (the redemption date). They also pay a stated interest rate each year, usually fixed. The value of the bonds themselves can rise and fall; however, the fact that bonds are riskier at the moment means companies are paying more in order to induce people to buy their debt. There are an increasing number of global bond funds entering the market that may enable you to get value from a lot of different markets.

Equity income
If your primary objective is the preservation of income, you may not consider the stock market as the obvious place for your money. However, for investors who are prepared to see their investments fluctuate in value while hopefully providing a stable income that grows over time, you may wish to consider equity income funds. These invest in shares, focusing on the big blue-chip firms that have a track record of good dividend payments. The dividends will be your income.

Global equity income funds
Further up the risk scale are global equity income funds. These are similar to UK funds, except that there are only a handful of the big blue-chip firms that pay reliable dividends in the UK, whereas global diversification offers a significant range of companies to choose from. Investing in other currencies brings an added level of risk, unless the fund hedges the currency.

Equity income investment trusts
Equity income investment trusts are higher risk but similar to other equity income investments. They are structured differently from unit trusts and open-ended investment companies. Investment trusts are closed-ended. They are structured as companies with a limited number of shares. The share price of the fund moves up and down depending on the level of demand, so the price of the trust depends not only on the value of the underlying investments but also on the popularity of the trust itself. In difficult times, when investors are selling up, trusts are likely to see their share price fall more than the value of their underlying investments. This means they also have more potential for greater returns once better times resume. Investment trust share prices are therefore often at a ‘discount’, or ‘premium’ to the value of the assets in the fund.

Paying Inheritance Tax

Usually the ‘executor’ of the Will or the ‘administrator’ of the estate pays Inheritance Tax using funds from the estate.

An executor is a person named in the Will to deal with the estate – there can be more than one. An administrator is the person who deals with the estate if there’s no Will.Trustees are responsible for paying IHT on trusts.

Work out if Inheritance Tax is due on an estate
To estimate how much Inheritance Tax you could have to pay, add up the value of all your wealth, subtract your liabilities and the £325,000 nil rate band allowance, and then multiply the remainder by 40%.

If you are married or in a registered civil partnership, add up your combined estates and reduce these by two nil rate band allowances of £325,000 each (£650,000) before applying the 40% rate to estimate your potential liability to Inheritance Tax.

Married couples and registered civil partners are allowed to pass their possessions and assets to each other tax-free, and, since October 2007, the surviving partner is now allowed to use both tax-free allowances (providing one wasn’t used at the first death).

Gifts made within the last seven years are not included in the calculations but may be liable to IHT on a sliding scale.

The calculation for valuation of your estate is for your general information and use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their
particular situation.

If IHT is due on the estate, you would need to complete HM Revenue & Customs (HMRC) form IHT400. You may also need to send other forms at the same time.

If no IHT is due, you’ll need to complete form IHT205 to tell HMRC that no IHT is due on the estate.

You or your solicitor will need to send the forms with your application for probate (‘grant of representation’). This is called ’confirmation’ in Scotland.

The grant of representation (confirmation) gives you the right to deal with the estate as the executor or administrator.

Deadline for paying Inheritance Tax
The executor of a Will or administrator of an estate usually has to pay IHT by the end of the sixth month after the person died. After this, the estate has to pay interest.

You can make early payments before you know what the estate owes. Interest isn’t due on this amount.

You can pay IHT in instalments over 10 years on things that may take time to sell, for example, property and some types of shares.

There are different deadlines for paying IHT on a trust.

Do you have enough money to retire comfortably?

New data shows consumer confidence improving but worry is still strife
Data recently released by Aviva shows that over half (55%) of UK consumers worry that they will not have enough money to provide an adequate standard of living when they retire, with 18% of consumers saying they do not hold any form of savings or long-term investment products. Almost the same proportion of consumers (49%) think they will have to work beyond the normal retirement age.

The findings are the result of the latest edition of Aviva’s Consumer Attitudes to Savings (CAS) survey, which asks people for their views on saving, financial planning and financial priorities. It represents the views of 13,000 consumers in twelve countries, and offers market overviews as well as UK regional analysis.

For the first time in three years, consumers’ confidence in the economy has surpassed confidence in household finances:

Net confidence [1] among UK consumers in the general economic outlook, whilst still negative, has risen by 26 points from -33 to -7 percentage points over the past 12 months.

Meanwhile, net optimism over UK household finances only grew by 7 points to -11 percentage points over the same.

So, whilst economic confidence is growing, people’s confidence in improvements of their own household finances is increasing much more slowly.

According to the data, these levels of concern are having an impact on consumer spending. Over two thirds of UK consumers (71%) are cutting back on discretionary spending such as eating out in restaurants (51%), holidays (46%) and clothing (46%).

Just under one third of UK consumers (34%) feel that they are ‘just about getting by’ financially, with 14% saying they are finding it difficult to cope with household finances.

Financial constraints
Across Europe, the latest survey shows that consumers remain similarly concerned about their own financial resilience.

Unexpected expenses (57%), such as home repairs and increases in the price of basic necessities (52%), are the two primary financial concerns for European consumers. As a result, over half of European consumers surveyed are cutting back on discretionary spending.

Financial constraints have an impact on Europeans’ long-term planning. While two thirds of consumers have some type of savings product, only 38% of those surveyed in six European markets said they were taking steps to ensure they have an adequate level of income in retirement. Meanwhile, almost half of the pre-retired Europeans surveyed (49%) expect to work beyond their normal retirement age to fund their retirement.

Confidence in the general economy and household finances is improving slowly. Although net economic confidence remains low at -24 percentage points, the six percentage point improvement may be a sign of an initial recovery in European consumers’ confidence across the region.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future.

1. The twelve markets surveyed as part of the Aviva Consumer Attitudes Survey were the USA, the UK, Ireland, France, Italy, Spain, Poland, Turkey, China, India, Singapore and Indonesia in November 2013.
2. The six European countries surveyed were Ireland, Spain, France, Italy, Poland and the UK. Together they represent over half the population of the European Union.
3. Aviva’s Consumer Attitudes Survey surveys 13,000 consumers across 12 countries since 2004.
4. 1,000 consumers in the UK were surveyed as part of this work.
5. In each EU country a sample of 1,000 adults aged 18+ were surveyed online in November 2013. Data have been weighted to the known profile of the adult population of each country.
6. Fieldwork was undertaken by Ipsos on behalf of Aviva between October 24th and November 8th 2013.