Investment bonds: the nasty effects of tax

EdInvestor

:mad:http://www.moneymarketing.co.uk/cgi-bin/item.cgi?id=172200&d=340&h=341&f=342


New research shows how investing in the same fund in an investment bond, rather than directly in a unit trust can cost you loads because oif the hidden taxes.

And that's before you take the typical high charges of the bond into account.

If £50,000 had been invested for the last five years in JP Morgan's natural resources fund, a higher-rate taxpayer cashing in this week would get £247,000 if the fund was in a collective but only £183,500 if held in an onshore bond and £193,000 in an offshore bond.
Invesco Perpetual's high-income fund would have produced £109,500 for a higher-rate taxpayer in a collective but only £93,300 if held in an offshore bond and £97,200 if held in an onshore bond.

Avoid these bonds.

dunstonh

Article is flawed. It uses equity funds and equity funds are not as efficient in investment bonds as they are in unit trusts. Fixed interest funds have identical tax treatment within the bond and are usually cheaper than unit trusts so a portfolio that is heavy in fixed interest funds can be cheaper and more tax efficient. The article barely mentions individual taxation and you must otherwise it is totally flawed.

i.e. a higher rate taxpayer would have a higher rate tax liability on unit trusts but could avoid it on bonds. or an over 65 with income close to or just over £21,800 could use a bond to avoid the age allowance reduction and save nearly £1000 a year in tax.

The research is not new. It just highlights when a bond isnt best. Not when it is best.

And that's before you take the typical high charges of the bond into account.

Stop telling lies. You have been corrected on this so many times but you continue to tell outright lies about this. The charges can actually be far lower than a unit trust as well as some versions being far higher.

Its a bit like saying that just because one car may cost £100k then all cars cost that much and should be avoided. We will just pretend all the cheaper ones dont exist as that would be inconvenient.

Avoid these bonds.

Avoid Eds bias against the bond. I refer you to the old NU thread where Ed told a poster not to use an investment bond because the IFA would earn around £10,000 from it and use unit trusts instead (just as she is saying here). However, if that poster had done that she would have had nearly £200,000 of extra tax to pay because the bond wasnt used. Eds opinion was that it was better to pay £200k of tax and not be in a bond that would have avoided that tax.

Edit: Just picked a low cost version of a bond and JPM Natural resources fund and did include wrapper charges to get a like for like basis. I also included the version that Fidelity use in their bond. Then looked at the net performance.

From 25 Sep 2006 (launch date of the fund within the NU investment bond).
NU JPM Natural resources: 32.2%
JPM Natural Resources UT: 28.4%
Fidelity (SL) JPM Natural Resources: 22.8%

source: Financial Express.

So, as you can see, the Fidelity version is the worst version. The unit trust in the middle but the lower cost NU version is the best. (that is after tax and charges for a basic rate taxpayer. Higher rate taxpayer would be worse on the unit trust version). Perhaps Fidelity were just comparing their version of the bond to the unit trust. Its clear from those figures that other versions of an investment bond are a lot cheaper.

EdInvestor

dunstonh wrote: »

The charges can actually be far lower than a unit trust as well as some versions being far higher.

Perhaps you can explain this case here where the advisor is asking 8% upfront.We see this kind of ripoff with investment bonds quite regularly.

http://forums.moneysavingexpert.com/showthread.html?t=1131779

The combination of the taxes and the charges can seriously dent your wealth.

TBeckett100

dunstonh wrote: »

i.e. a higher rate taxpayer would have a higher rate tax liability on unit trusts but could avoid it on bonds.

i thought higher rate tax was scrapped on CGT. A HRT would likely suffer 40% tax on bonds against 18% CGT

dunstonh

EdInvestor wrote: »

Perhaps you can explain this case here where the advisor is asking 8% upfront.We see this kind of ripoff with investment bonds quite regularly.

http://forums.moneysavingexpert.com/showthread.html?t=1131779

The combination of the taxes and the charges can seriously dent your wealth.

Whats that got to do with the bond? Thats the adviser. However, the poster on that thread is mixing up 8% charge with 8% commission.

i thought higher rate tax was scrapped on CGT. A HRT would likely suffer 40% tax on bonds against 18% CGT

Dividends are still subject to higher rate tax. CGT changes favour unit trusts now. However, its not quite as clear as the bond charging 20% and the CGT rate being 18% as life companies still get indexation. However, you CGT alone wouldnt be a reason to do bond or UT.

jem16

dunstonh wrote: »

Whats that got to do with the bond? Thats the adviser. However, the poster on that thread is mixing up 8% charge with 8% commission.

I got that impression too and have asked the OP that very question - no reply as yet though.

TBeckett100

ok, Norwich Union investment bond. 1% BASE AMC, 0.5% establishment charge meaning 1.5% PA for 5 years. Adviser gets 7%.
Where is the issue? I liken the AMC to a Unit Trust and there are no initial charges and the adviser still gets paid.

jem16

TBeckett100 wrote: »

ok, Norwich Union investment bond. 1% BASE AMC, 0.5% establishment charge meaning 1.5% PA for 5 years.

Only NU internal funds available at the base AMC. Not really the same quality as using a mix of internal and external funds.

Adviser gets 7%.

As an IFA would you take the whole 7%?

Where is the issue? I liken the AMC to a Unit Trust and there are no initial charges and the adviser still gets paid.

To be fair, the issue is that if the adviser takes the full commission it tends to make the bond dearer because of its higher charges in the first 5 years - obviously dependent on funds chosen. If the adviser rebates some or most of that commission, then the initial allocation is increased which offsets the higher charges. This is what makes the low cost bond good value.

TBeckett100

the amount of commission taken varies between the age of the client, ongoing work and time spent.

Someone who only invests 50-60k but expects 2 review meetings a year etc has to be paid for somehow. Some cases pay £40k-£50k comm, but that gives a lifetime of service without the need to charge fees.

Billa client £150ph and they will only walk to someone who will take commission

jem16

TBeckett100 wrote: »

Some cases pay £40k-£50k comm but that gives a lifetime of service without the need to charge fees.

What do you do with the natural trail commission of 0.5% paid by fund providers to the IFA? On an investment of £750k that would be £3750 and rising with the investment.

Billa client £150ph and they will only walk to someone who will take commission

I would think that would depend on the amount invested.

dunstonh

When an adviser takes the 7% figure, they are giving up the 0.5%p.a. An IFA can take say 4% plus 0.5% p.a. or 7% with 0% p.a. but the charges to the client are the same. The provider if effectively paying a few percent more up front but then keeping the 0.5% for themselves. This can be done with a number of unit trust providers as well so its not unique to this tax wrapper.

There are some providers where it can actually be cheaper to take the money up front. Clerical Medical is a good example of that where taking 8% initial commission is cheaper for the client than taking 3% plus 0.5% p.a.

So, there are often exceptions to the rule which can be a pain at times.

Billa client £150ph and they will only walk to someone who will take commission

This is a big problem. If a consumer is willing to sit down and listen to you explain the difference between fees and commissions and then understand it, they will go with the fee or hybrid fee option nearly every time. However, far too many dont get it and think that paying a fee is the expensive option. Especially if they have seen bank tied sales reps and have been told seeing IFAs is expensive as they charge you fees. You have to get the individual out of that mindset and some are open minded and willing to learn but too many others are not.