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Bubble and squeak

Further to our recent discussions, we now have £180,000

available to invest. We would like to achieve a better return than is

currently available in the bank and building society but without the

risk of investing directly into stocks and shares. My wife has a

small pension in her own name but, apart from that, the rest of our

pension income is in my name.

We would like to keep a good chunk of the cash accessible so could

you advise us how wemight invest the capital to generate a lowto

medium-risk income?

At our last meeting, we discussed in detail the various options

available to you, particularly with regard to risk and reward. You

made it quite clear that you are averse to direct investment in

equities and that you are not prepared to see your money fluctuate

wildly in line with the equity markets.

However, you acknowledged that some risk is required in order to

achieve better returns. I would therefore suggest the following.

You should keep £70,000 in a building-society postal account in

your wife&#39s name. This will generate an income of 4.3 per cent gross

and will utilise most of your wife&#39s remaining personal tax

allowance. It will also provide you with a substantial cash reserve

that you can access for opportunities and emergencies. However, you

need to be aware that there will be no opportunity for capital growth

with such deposit-based funds.

I would then normally suggest some investment into equities for their

long-term growth capability but you have lost money in the past with

equity investments and would prefer to avoid them.

I would therefore recommend investing £40,000 in funds spread

equally among gilts and corporate bonds via the Norwich Union

portfolio bond. Gilts, in the short term, are still being used as a

safe haven in the uncertain environment although, looking forward,

the growing budget deficit will become a strong adverse influence.

However, gilts are still expected to better building-society returns

and have the security of being backed by the Government.

Bonds have outperformed equities over the last 10 years. Questions

are beginning to emerge about whether the bond market could be the

next bubble to burst but bonds are a core asset class. There will be

a greater use of bonds by pension fund trustees to immunise

portfolios from losses in the future.

The losses of recent years have increased the pressure on corporate

balance sheets and so corporate bonds should continue to offer the

potential for reasonable returns. You should be able to draw an

income of about 4 per cent net of basic-rate tax with some chance of

capital growth.

Then I would invest £30,000 into the Scottish Widows flexible

bond. The with-profits income fund currently pays a regular bonus of

4.5 per cent a year. This is a more modern and transparent

with-profits fund with no exposure to equities. The core assets are

invested in fixed-interest bonds and property, so the bond will again

offer the chance of a decent low-risk income.

Half the core assets will be invested in lower-risk fixed-interest

bonds issued by companies with investment-grade credit and the rest

of the core assets will be invested in assets with potentially higher

returns but higher risk such as other fixed-interest bonds and

property. As basic-rate taxpayers, you will receive the income with

no more tax to pay.

For the balance of £40,000, I would recommend an investment

into the Gold 5 ING UK Property Income Limited Partnership issued by

Pinder Fry and Benjamin. This is an opportunity to invest in an

existing commercial property portfolio managed by one of the top UK

property fund managers. The investment will be into a limited

partnership owning an existing portfolio of UK commercial property of

institutional quality totalling 22 properties spanning the retail,

office, retail warehouse and industrial sectors.

With a term of seven to nine years, the expected income is 8 to 9 per

cent a year. The portfolio has a low tenant risk profile and so

offers the potential for a high income with low to medium risk. There

may be a slight potential for an increase in the capital value

through active management.

Please note, the real benefit of these investments will be seen over

the longer term and their values will still fluctuate on a day-to-day

basis but without the risk and volatility of direct equity

investments.

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