Investment Portfolio Bond?

ClaireLouise_2

Hi everyone

I work as a bookkeeper for small businesses and not for profits and one of my clients has asked me about a Friends Provident Investment Portfolio Bond. I am in no way an IFA and I know the tax laws on this have recently changed so just wondered whether anyone had any direct experience of it.

Essentially the client has a significant investment in a single-premium life insurance investment bond which was taken out in September 2007. This was just before the Government announced changes in the tax rules governing such bonds - making them less worthwhile now than Unit Trusts and OIECs, unless you are a higher rate taxpayer.

The question he is mulling is whether to withdraw it gradually (7.5% per annum for the first five years with no penalty) and to invest it elsewhere, or whether to leave it where it is. He is likely to lose around 5% of the sum he withdraws (difference between selling price and buying price). No growth or gains have been made. My gut feeling is that he could invest the 7.5% per annum in a more worthwhile and tax-efficient way elsewhere - but just wondered whether anyone else had any views or experiences??

Thank you so much.

dunstonh

making them less worthwhile now than Unit Trusts and OIECs, unless you are a higher rate taxpayer.

That is not correct. When the rule changes on the tax were first announced it appeared they would be worse off. However, with final clarification and more information it is now clear that equities are slightly worse off in investment bonds but fixed interest funds are no worse off.

Indeed, equities may not be that much worse off where the CGT allowance is fully utilised beforehand as the insurance companies can still use indexation whereas an individual cannot. However where the CGT allowance isnt used, then equities are based placed in a unit trust.

Charges also need to be considered as well. Some of the funds in the bond can be quite cheap. Although the value tends to be more on the fixed interest side or if the IFA has arranged it on good terms (discounting or fee basis normally). F&C funds in particular are cheaper in the bond than they are in unit trust form normally.

Frequent switchers may find the bond more efficient as there is no CGT chargeable event when fund switching on a bond.

He is likely to lose around 5% of the sum he withdraws (difference between selling price and buying price).

The FP investment bond is single charged so there is no difference between buying price and selling price. If he is reinvesting the 7.5% then you would typically expect that to be done on zero cost (may be very slight initial charge on some funds but most would be nil cost). Taking out enough to feed the ISA is a sensible move. Maybe unit trust as well.

My gut feeling is that he could invest the 7.5% per annum in a more worthwhile and tax-efficient way elsewhere

Its not just tax efficiency where bonds may or may not be better. They are not included in the means test for pension credits or social security benefits and cannot be included in the means test for local authority care. Over 65s can benefit from bonds as well as income from bonds does not go towards the age allowance reduction.

So, all in all, it depends on the portfolio make up (equity, property and fixed interest), charges, if personal CGT allowance is used and likelihood of benefits now or in future or age allowance reduction (depending on age).

dragonriding

Hi there, I believe you are a Finanial Advisor and would like some advice please. I am caring for my Mother, who is 89 and she is in the process of selling her house, I do not want this money to be taken by the Local Authorities for her Care home fees, should she require to go into a Care Home..on searching the MoneyExpert Site I came across something that you had said to another member of the site reference these Bonds...and that they were not of much use if you were looking for interest, which I am not doing, I just want to protect the money from the Local Authorities, can you advise me if this is so please?? Pat Crossland aka Dragonriding

dunstonh

Hi there, I believe you are a Finanial Advisor and would like some advice please.

You dont get advice here. Just discussion.

Investment bonds are a tax wrapper (a container) for investments. Just like an ISA or pension but with different maturity method and tax. Technically, Investment Bonds are life assurance plans and the Govt does not allow life assurance plans to be included in the local authority care means test (or pension credits calculation).

However, the investment bond has to be set up well in advance of knowing that local authority care is going to be needed otherwise it will be classed as deprivation of assets and the local authority will just claw it straight back into the means test. It also needs to be set up with good justification. For example, you cant set it up on the basis that it avoids local authority means testing. It has to be that you want investments.

The problems you have with that is that at 89 years old, your mother isnt likely to want investments. Invesmtents can carry risk and can go down as well as up. Not usually the sort of thing an 89 year old is likely to be interested in.

Also, if you take regular withdrawals as income, the these are included in the means test. So, that could defeat the purpose.

dragonriding

Thank you very much for that dunstonh....you have confirmed what I thought...

dragonriding

Is there any other way that I can protect her money from the Local Authorities then??