HL to review all investment bond sales

EdInvestor · 13 October 2007 at 4:50PM

http://www.moneymarketing.co.uk/cgi-bin/item.cgi?id=151955&d=340&h=341&f=342

Tax changes in the pre-budget mean that these products are no longer suitable for many investors.If you have recently been sold one, you should go back to the advisor or bank and request a reveiew too.

dunstonh · 13 October 2007 at 9:43PM

HL have not announced they are reviewing them all. Read the title and read the article and you will see its not all.

Whilst the capital gains tax advantages have gone, the income tax advantages still exist and for those with income paying funds, then there is little or no difference.

There is little HL can do about it as once the bond is outside the cancellation period, there is nothing to be gained by changing in the early years unless it is a clean allocation/exit penalty and these tend to be the more expensive ones anyway. Most investment bonds are heavy in income funds so there is little to be gained from this.

jem16 · 13 October 2007 at 10:12PM

EdInvestor wrote: »

http://www.moneymarketing.co.uk/cgi-bin/item.cgi?id=151955&d=340&h=341&f=342

Tax changes in the pre-budget mean that these products are no longer suitable for many investors.

Far from impacting on many, it will actually have a small impact on few.

http://forums.moneysavingexpert.com/showpost.html?p=6529853&postcount=22

EdInvestor · 13 October 2007 at 10:52PM

I seem to remember you are a higher rate taxpayer Jem. So formerly a bond might have made sense for you, as you might have been able to reduce your CGT to 20% inside the bond, vs 40% outside.

But now you will pay 20% in the bond (and possibly another 20% if you are still an HRT when it matures) vs 18% outside. Income is taxed the same insode and out, so it would be better to bin the bond.

Of course you may have to stick with your bond for the moment if it has high surrender penalties as is normal with these expensive products.

jem16 · 14 October 2007 at 12:06AM

EdInvestor wrote: »

I seem to remember you are a higher rate taxpayer Jem. So formerly a bond might have made sense for you, as you might have been able to reduce your CGT to 20% inside the bond, vs 40% outside.

But now you will pay 20% in the bond (and possibly another 20% if you are still an HRT when it matures) vs 18% outside. Income is taxed the same insode and out, so it would be better to bin the bond.

Thank you for your "advice".

If I bin the bond as you suggest I will have to pay an extra 25% tax on dividend payments. Assuming even a small 2% yield then that will be another £600pa on tax.

I will also not be an HRT when it matures.

Of course you may have to stick with your bond for the moment if it has high surrender penalties as is normal with these expensive products.

Just as well I haven't got one of those imaginary expensive products you keep referring to.

The amc on my bond is 1.2% - less than the amc of 1.5% that I would be paying on unit trusts.

EdInvestor · 14 October 2007 at 12:00PM

You've forgotten about the 20% tax you will pay within the bond, which means you'll be worse off under the new rules.But you don't have to take my word for it....

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/14/cnins114.xml

The Association of British Insurers fears sales of investment bonds – worth more than £20bn in 2006 – will grind to halt. Returns on life insurance-based products will continue to be classed as income and so higher-rate taxpayers will pay tax at 40 per cent. On the other hand, returns on products such as unit trusts will be treated as capital gains and taxed at 18 per cent. One senior insurance insider called it "a !!!!-up" and added: "This could be a disaster – we're !!!!!!ed."

It could render insurance bonds obsolete as an investment bondholder pays twice as much tax as a unit trust investor. A £50,000 investment in an investment bond that grows by 50 per cent would be worth £70,000 after the profits have been taxed at 20 per cent. However, the same investment in a unit trust would have a taxable charge of just £15,800 once the CGT allowance of £9,200 has been taken into account. An investor would pay just £2,844 tax at 18 per cent, compared with £5,000 with an investment bond.

Danny Cox of Hargreaves Lansdown, the financial adviser, said: "As a private investor, especially a higher-rate taxpayer, why would you invest in a bond now?

dunstonh · 14 October 2007 at 12:42PM

Ed you are making too many incorrect assumptions.

The taxation applies to growth not income. Income generated within the funds has the same treatment in unit trusts as investment bonds. A portfolio with a high income content is still best within a bond for a higher rate taxpayer. The CGT paid will be 20% though and not 18%.

The change in CGT has made investment bonds unsuitable for those that were using it purely to avoid 40% CGT. However, none of the other reasons have changed.

Danny Cox of Hargreaves Lansdown, the financial adviser, said: "As a private investor, especially a higher-rate taxpayer, why would you invest in a bond now?

Thats a foolish statement to make or it has been taken out of context or perhaps HL's bias towards unit trusts is the reason. Seeing as they dont have an onshore bond wrapper on their fund supermarket.

If that is indeed the official take of HL, then I would have to question the quality of the advice they give. I would like to see them do trust work without using a bond.

It certainly reduces the number of times a bond will be best advice but it doesnt kill it off. Most bonds were done for income generation or estate planning. Estate planning will be hit with the increase in IHT limits. Personal CGT avoidence will be hit obviously but income generation or high yield portfolios can still see the bond as a possible solution.

Lets take £100k and say it grows 10% with 5% of that down to income. 5% of the growth is hit with 20% CGT and thats £1000. Outside of the bond, the CGT would be 18% so thats £900. So, bond loses out there. However, a higher rate taxpayer would pay no further tax on the income in a bond but in a unit trust they would to pay a further 22.5% income tax. So, that £5000 income in the bond has no further taxation as the tax credit covers that. On the unit trust, there would be a further £1250 to pay in income tax. Bond wins that round.

So, using a higher yield portfolio of £100k the bond is about £1150 better if CGT allowances are used up and about £250 better if no personal CGT liability was used.

Using Jems example of her 1.2% amc compared to 1.5% typical on unit trusts, she is £300 a year better off there.

So, its still possible for higher rate taxpayers to see gains above unit trust on the bond.

It all depends on the portfolio and what tax you are trying to avoid. As it stands, higher rate taxpayers investing in a varied portfolio with a large investment may well be best advised to use a bond for the high yield funds and use unit trusts for the low/no yield investments.

jem16 · 14 October 2007 at 12:56PM

EdInvestor wrote: »

You've forgotten about the 20% tax you will pay within the bond, which means you'll be worse off under the new rules.But you don't have to take my word for it

I hadn't actually.

Unlike you my adviser actually knows about taxation within the bond.

Best to stop relying on the media for your information. From first hand experience when they reported my husband's accident I know they are far from reliable.

dunstonh · 14 October 2007 at 1:12PM

It is funny how headlines can be made out of routine events. It's common to make reviews of funds, products etc when changes occur. A review of 100 cases could find not one of them needs changing. Reviewing products and funds held is standard on any client with ongoing servicing. I bet there wont be one change made to the cases they review as the cost of changing will be more than the amount they would save.

If I was a cynic, I would say its just another way for HL to get their name in the media. Something they are very good at. HL reviewing 2 months of cases is a nothing story yet the way it is worded turns into an HL advert.

EdInvestor · 14 October 2007 at 1:37PM

dunstonh wrote: »

Lets take £100k and say it grows 10% with 5% of that down to income. 5% of the growth is hit with 20% CGT and thats £1000. Outside of the bond, the CGT would be 18% so thats £900. So, bond loses out there.

Outside the bond, the 5% attributable to growth (5k) comes within the annual CGT allowance of 9.2k and thus no tax would be payable for HRT or BRT.Inside the bond both would pay 20% on the growth.So that's 1000 tax payable vs Nil.

Inside the bond neither the BRT nor the HRT would pay tax on the income until the bond is cashed in, at which point if the investor is on HRT, he has to pay another 20% tax, ie 40% in all..

Outside the bond, the HRT has to pay 25% on the income ie 1,250.So there's very little difference - 1k is payable now (on the capital growth inside the bond, and 1.25k on the income outside the bond, so 250 more, but if the HRT uses the bond he risks getting done for another 20k on maturity. The obvious thing to do is to hold direct and reduce income component.On a 100k investment a 250 pound difference can easily be sorted through lower charges in any case.

There is zero argument for anyone on BRT using a bond, especially now all the IHT trusts etc are unnecessary and the care costs system is under review.

The argument for using the bond if the investor wants to put 100k wholly in bonds would IMHO fall down because the reduction in yield would be too high after tax and charges. The effect will be much the same as what we see with the zombie endowments.

It might be useful for property funds though, as many of the better funds at the life companies are only available through this route anyway.

One can see a potential structure emerging:

Equities held direct or in UTs/Oeics
IBs for property funds
ISA for bonds and cash

But I can see why the insurers are so upset considering the massive amounts of money they have recently been making out this product.On the other hand it levels the playing firled with the fund managers and that's excellent news for investors as their investment quality is on the whole much higher.

It all depends on the portfolio and what tax you are trying to avoid. As it stands, higher rate taxpayers investing in a varied portfolio with a large investment may well be best advised to use a bond for the high yield funds and use unit trusts for the low/no yield investments.

Agreed, but only if charges are very competitive on the bond, which is not usually the case.

jem16 · 14 October 2007 at 1:47PM

EdInvestor wrote: »

Originally Posted by dunstonh
It all depends on the portfolio and what tax you are trying to avoid. As it stands, higher rate taxpayers investing in a varied portfolio with a large investment may well be best advised to use a bond for the high yield funds and use unit trusts for the low/no yield investments.

Agreed, but only if charges are very competitive on the bond, which is not usually the case.

Which is exactly what my portfolio is doing. The bond is only part of the bigger picture.

I'm glad that you now agree that in my case the bond is still suitable.

Best not to advise "bin the bond" until you have all the facts.

HL to review all investment bond sales

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