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Last Updated: Thursday, 29 September 2005, 21:12 GMT 22:12 UK
Ask the expert: Investing risk-free
Francis Klonowski
Francis Klonowski shares his investment expertise
BBC News' Ask the Expert column gives readers a chance to have their financial questions answered.

This week Francis Klonowski, a specialist in retirement planning and former financial planner of the year, helps Your Money reader Martin Pugh who has 270,000 to invest from the sale of property.

Mr Pugh wants to know what types of investment offer a steady no-risk monthly income with no chance of eroding the capital invested.

However, the situation is complicated by the fact that Mr Pugh plans to move to Spain in four years time and he will need access to his money to make his fun in the sun dream come true.

Francis Klonowski writes:

You first need to decide how much monthly income you wish to receive, and for what purposes.

Is it to be your total income, or to supplement income from other sources? Could you accept any fluctuations in the level of income? Only with such information is it possible to give definitive answers.

You also need to determine how you wish to use the money in four years time.

Is it to buy property in Spain, or to invest for longer-term income?

Remember that capital preservation can leave you worse off: if you withdraw and spend all the interest generated, the value of your capital will reduce in real terms because of inflation.


Having identified your income needs, you should set aside enough to cover the first 12 months' requirement in an easily accessible deposit account.

Although you will be withdrawing from it and therefore depleting the capital, it will leave more scope for longer-term returns on the remainder of your money.

Tax breaks

Believe it or not, you can put away up to 93,000 for tax-free returns, with no risk to the capital.

You can do this through a combination of cash ISAs, national savings premium bonds and savings certificates.

You are allowed to shelter up to 3,000 a year in a mini cash ISA.

Money in mini cash ISAs is not subject to tax.

Over the next four years you could invest up to 12,000 in mini cash ISAs.

Investing in national saving index-linked and fixed-rate savings certificates should ensure that your capital is protected and you receive a reasonable rate of interest.

This type of investment does not provide income but it will give tax-free interest for later years - by which time your plans for Spain should be a bit clearer.

If I was in your position, I would also consider national savings premium bonds.

You can invest up to 30,000 in premium bonds. The worst that can happen with premium bonds is that you only get back your original capital, but there is the chance of scooping substantial tax free prize.

Deposit Accounts

After you have utilised mini cash ISAs and national savings then you should consider putting a substantial proportion of your cash into a High Street bank or building society deposit account.

This will ensure that the money does not go down in value.

You could, however, improve returns by holding part of it in accounts requiring longer periods of notice.

How you hold it will depend on your tax situation.

For instance, if you are a non-taxpayer with a personal allowance of 4,895, on average interest rates of 4.5% you could hold around 108,777 before paying tax - providing you have no further income.

Conversely, if you're married and either of you is a higher rate taxpayer you should consider holding such deposits in the name of the lower-paying spouse.

This kind of division, however, should only be made after careful consideration.

Tax saving is all very well, but you also need to consider the practical problems of holding so much in one name; and the potential impact on your inheritance tax liability if one of you died.

The actual percentages would depend on your answers, but I would divide the money as 40% in notice accounts, and 60% easy access deposit accounts.

Going for gilts

You could also consider short-dated gilts due to mature within your three-year period.

Gilts are bonds issued by the government - in return for your "loan" to them, they pay a fixed rate of interest for as long as you hold them.

They are regarded as safe investments, as the government is unlikely to go bust or to default on the interest payments.

However, you are not guaranteed to get all your capital back under all circumstances, which is why gilts are should be seen as investments rather than a form of 'savings'.

Gilts have a face value (nominal value) of 100; they are bought and sold on the stock-market, and the market price can move up and down just like that of corporate bonds.

If you buy gilts at, say 120 each, you will only get back 100 each if you hold them to their maturity date.

At maturity date, gilts are 'redeemed' by the Treasury - this simply means that the Treasury repays the face value to the person holding the gilt.

If you bought gilts at, say, 95 you would make a capital gain when the gilt is redeemed at 100.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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