I'm holding out for a Zero! (Zero-Dividend Preference Shares - What are they?)

Member Name: SueMagee

Product:	Zero-Dividend Preference Shares - What are they?
Date:	22/07/01 (494 review reads)
Rating:

Advantages: Moderately low risk,, Fixed return,, Tax efficient.

Disadvantages: Some risk!

The only fool-proof way of doubling your money is to fold it up and put it back in your pocket, and any scheme that suggests otherwise should be looked at with “If it looks too good to be true, it probably is” firmly in mind. Mm…two clichés in one sentence isn’t bad is it?

You could, of course leave your money in a building society for twenty years, at which point inflation would have reduced the purchasing power of the money by half, so you’d be back where you started.

Some people do it, though, don’t they? They manage to make a nice profit on their investments without having to pay a lot of tax into the bargain. How do they do it? Well, one of the best-kept secrets of the people who are making the money is Zero Dividend Preference Shares, or Zeros, as they’re commonly known.

One of the problems is in the name. It sounds as though you’re getting nothing for your money and this puts people off. What it means is that instead of getting a dividend, on which you would have to pay income tax, your investment is bought back from you at a pre-arranged price on a pre-arranged date. Instead of receiving income you are making a Capital Gain, which is liable to Capital Gains Tax. Now, every individual has a Capital Gains Tax allowance. You can make gains of up to £7500 in the year to 5 April 2002 without paying tax and this generally goes up in line with inflation each year, so unless you make total capital gains of more than the annual exemption you have no tax to pay when the investment matures.

In the other ops that I’ve written on the subject of savings and investment I’ve talked about risk and the ladder of risk. If you’re really a glutton for punishment you can go and have a look if you’re considering investing, or you want to know more. Right at the bottom of the ladder of risk are the Bank and Building Society investments, and at the top are the risky
investments such as Venture Capital Trusts. Zeros come a quarter of the way up. They are a little riskier than a Bank or Building Society, but not as risky as a normal Unit Trust because they normally rank above most other share classes when it comes to repayment. At a time when the Stock Market is very volatile and interest rates being paid by Banks and Building Societies is falling they have to be considered.

The main risk is that the Investment Trust will not have the capital to pay out the promised sums, although it should be noted that in the fourteen years since Zeros were invested no Trust has ever failed to meet its commitments. That doesn’t mean that it will never happen, but it is a reassurance. Generally the higher the promised rate of return the riskier the investment. If you are thinking of making an investment you should consult an Independent Financial Adviser who will be able to look at all your circumstances and give appropriate advice. The adviser will be looking at the “cover” which a Fund has. The “cover” tells the adviser how much the assets of the Fund could fall each year whilst still allowing the Fund to pay the promised sum on maturity. Generally, the higher the cover the lower the yield.

They’re not a place to put the money you might want to get at in a hurry, as you might have to sell at a loss. When you invest you really should be thinking in terms of holding them until they mature, which would generally be about five years from the date of investment.

So why would you invest in Zeros? They’re ideally suited to people who know that they’ll have a financial commitment at a certain point, such as school fees. Investments could be made so that they mature each year that fees will be payable with the result that they’ll be paid out of tax-free income rather than taxed income. They’re a useful tool for retirement planning with investments bei
ng made whilst you’re employed and organised so that they mature during retirement. It could be useful if you’ve got a special holiday in mind at some point in the future.

I don’t like advising people to invest in a certain Fund, mainly because I don’t want to be at the other end of an e mail if it goes wrong! I will tell you about a Fund that’s performed well over the past year, but please remember that past performance is no guarantee that the Fund will perform similarly in the future.

The Aberdeen Progressive Growth Fund was launched in August 2000 and since then it’s been the top performing Fund investing in Zeros. Its value has grown by 12.6% over a period when the Stock Market has fallen by 8.6%. The annual yield to maturity is 7%. To get the same amount if you received it as taxable income you’d have to be getting 8.75% if you’re a basic rate taxpayer and 11.66% if you pay tax at 40%. The only thing that makes me slightly nervous is that I couldn’t find any mention of the cover in the literature that I was sent AND they were offering me a free bottle of champagne if I was prepared to invest £4000. If you’re interested, give Aberdeen a ring on 0845 300 2890 or visit the web site at www.aberdeen-asset.co.uk.

As a final point I’ve seen a lot of literature which suggests that you might like to put your Zeros investment in an ISA. Frankly I can’t see the point unless you’re going to have capital gains of more than £7500 when the investment matures – and we should all be that lucky!

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