Investment Bond Advice
An Investment bond seems to be one of the most popular investment products for financial advisers to sell.
There are lots of different investment options to consider. The investment wrapper (pension, ISA, unit trust, investment bond, Investment trust, OEIC etc) simply determines the taxation of the Investment. We are picking on the Investment bond here, as it is widely misused in our view.
Read our page on ‘Investment Options’
Consider a number of issues, however:
There are three ways to measure an investment bond: charges, tax, and investment performance.
The charges are often hidden or at best disguised. The allocation rate they mention is a lure and if you have ever used a lure when fishing you will realise there are a number of sharp hooks which apparently don’t hurt the fish.
Instead of taking an upfront charge of x% it is hidden and charged to your investment over a period of 5 years typically.
Don’t believe it’s a bargain as the charge is reasonably steep. Ask your investment adviser if you took the cash out the day after investing what the charge would be and you’ll see the true impact of the charges, as they will hit you with the full fee at that point.
The tax is not advantageous at all. Study it and you’ll see that the tax break you are being offered is 5% of your investment as an income per year over 20 years (that’s just your money back and is hardly a break). What you also don’t see is that the investment fund is disadvantaged by paying tax as it grows and you can’t reclaim that. That’s more of a brake than a break. There are other tax problems, such as when an over 65 year old encashes the investment, the gain is added to their income. That could cost them to lose their age allowance and an immediate tax charge of up to £719.00.
If you are encashing the investment consider also that the gain will have to be calculated to assess if further tax is payable. The rate could easily be a further 18% if not planned correctly.
From a performance point of view it’s worth pointing out that most investment bonds have a limited range of funds, which are at the very best average. Some companies realise this and offer a large range of investment funds. One we looked at, had over 150 funds to choose from, but when I researched the actual investment performance, not one of the funds was on our buy list. They were simply a range of cheap funds to make you feel you were achieving an investment spread.
The more preferable options to consider are an ISA or unit trust. An ISA allows for the investments inside it to grow free of capital gains tax but you are limited to just £11,280 per person (for 2012/13). A unit trust has numerous breaks. You are allowed a capital gains allowance each year of £10,600 (for 2012/13). This means that you can access £10,600 each year without any liability to capital gains tax. If the gain is more than that, you can delay it for a year and use next year’s allowance. Remember that the allowance is per person and both husband and wife have one.
On that basis you could take 5% per year per couple from a £404,000 investment, which would be completely tax-free.
Lastly a unit trust allows you to offset any gains or losses you have made elsewhere. If you have made a gain on your 2nd investment property and your unit trust had gone down you could simply encash both in the same year and offset the loss against the gain.
An investment bond would not give you that break at all. In fact it gives you none.
We should hope it wouldn’t be a consideration of the adviser but you will find that some insurance bonds do pay up to 7.5% commission whereas a unit trust and ISA typically pay 3%. Your adviser will have to display this to you anyway.
Before encashing an Investment bond seek careful advice.
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