A Finance Daily member looks for advice from the experts about what to do with a lump sum investment.

Question

We have £220,000 to invest but will require a monthly income from this investment. We do not wish the capital to decrease & only need a monthly income to pay school fees. Can you recommend the best bond/savings accounts to look at please.

What the Experts Say

Donna Bradshaw of IFG Financial Services (www.ifg.co.uk) responds;

As you want to preserve your capital you are really restricted to deposit based savings. There are concerns that interest rates will go up again and therefore you may not want to fix into a fixed rate bond immediately; although many have rates in excess of 6%, which is an indication that interest rates are likely to go up. In addition, rates vary and what was the most competitive rate one month may not be the following one, therefore I recommend you keep up to date with what is available, should you decide to opt for a variable rate rather than a fixed rate, and switch to a better deal when necessary. In addition to interest rates, tax will have a significant impact on the income you receive and therefore it would be wise to apportion your savings so that they are held by whomever has the lower tax rate.

Looking at tax, a life assurance company investment bond, invested in a cash fund, could also be attractive depending on your tax position. I would recommend you take advice from an independent financial adviser if exploring this option. You should also maximise your mini cash ISA holdings, you can invest up to £3,000 each this tax year, this increases to £3,600 in the tax year 2008/2009. National Savings and Investments index linked savings certificates may also be attractive, depending on the rate of tax you pay. The fixed interest certificates may also be attractive if you are a higher rate taxpayer. For more information go to www.nsandi.com. For details of the most competitive savings rates in the market go to www.moneyfacts.co.uk.

Chris Wicks of the Alexander Beard Group Plc (www.abg.net) responds;

In order to provide a proper recommendation I need to know when the school fees are due and how much you are looking to provide. I also need to know whether you need to use some of the capital to fund the fees. If this is the case you will need an account that allows you to make withdrawals, presumably three times per year when the fees come due. Currently the Anglo Irish Bank Easy Access Deposit Account seems pretty competitive at 5.85% pa gross. The Northern Rock Postal Tracker 60 account offers 6.05% gross with 60 days notice and three withdrawals per year.

If the fees are not due for a while you could try an account which provides a fixed rate of return until they are payable, or a series of such accounts if the fees are a long way off. The Halifax Web Saver locks you in for 1 year but offers 6.3% pa gross, with no withdrawals allowed until the account matures. They offer a range of other terms, however the rates drop down to 6.12% for terms of 2 to 5 years.

I also need to know more about your tax status. If you are both higher rate tax payers and the fees are not due for a while, you may want to consider sheltering the deposit in an arrangement that allows for gross roll up of the interest with tax only being payable when you make a withdrawal. Various offshore investment bonds are available, offering access to a choice of deposits, which provide this type of tax deferral.

Daniel Clayden APFS – Director, Clayden Associates (www.claydenassociates.co.uk) responds;

You state that you do not want the capital to decrease … but does this mean that you do not want to erode your capital when funding the school fees or that you are not prepared to take any investment risk with the capital?

Any recommendation will depend on the level of income required to pay for school fees, with the cost of fees varying dramatically. A typical private primary school may charge £1750 per term (£5250 every year) for full time day school, whereas it will cost £24990 to board at Eton College in the 06/07 academic year … a difference of £19740!! You also need to consider the fact that if you’re looking to fund school fees for a 4 year old child starting primary school you could need an income over the next 14 years until they finish ‘A’ Levels at age 18 … and what about university after that! So if you were to take all of the income from your investment you should consider how the effects of inflation will impact on your savings. A rate of inflation set at 2.5% on a fund of £220,000 over a period of 14 years would have the effect of reducing it’s spending power in to just £155,700 in today’s terms (the retail prices index excluding mortgage interest payments for April 2007 was actually 3.6% - source: eMoneyfacts 29/05/07).

If you are not prepared to accept any investment risk to your capital in return for potentially higher investment returns, then the only real option that you should consider would be some type of deposit based investment. One of the best rates available for a fixed rate bond for a 12 month term with no age restriction is currently offered by West Bromwich Building Society on their E Bond 10, which is 6.36% if interest is paid on maturity or 6.18% if paid monthly (which before tax would be £1133 per month on £220,000). But remember that a gross rate quoted at 5% is equivalent to just 4% net of basic rate tax and only 3% to a higher rate tax payer. You should also consider using tax-free cash ISA allowances, but remember these are currently restricted to only £3000 per person per tax year.

Alternatively if you are prepared to accept some level of investment risk then you may want to consider using an investment bond and utilise the 5% annual ‘income’ allowance or a Unit Trust/OEIC utilising your £9200 (2007/08) Capital Gains Tax annual allowance in order to produce a monthly income.

I would recommend that you contact an Independent Financial Adviser who can offer an unbiased recommendation tailor made to your requirements.

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