Investment bonds: the nasty effects of tax

jem16

dunstonh wrote: »

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.

Although this method is reliant on the IFA providing ongoing servicing even though he/she is paid all upfront. I expect with a good IFA this should not be a problem but some may take advantage.

dunstonh

If you just want to highlight how poor reporting can influence a story, this is an example of it.

Ed posted a link reporting a story based on information from Paul Kennedy from Fidelity. The story focused on the negatives of an investment bond which of course Ed latched onto like a limpet. However, that same Paul Kennedy has said in a press release from Fidelity (8th Sept):

" As outlined in our hugely popular 'Insurance Bonds v Collective Investments', post-budget Insight Paper, it's clear that certain asset classes work better with certain wrappers from a tax perspective".

That is the same thing that we have been saying for a while now. The money marketing article could easily have been written as investment bonds being better than unit trusts for fixed interest funds using the same basis that they picked equities which are better in unit trusts. Rather than balance the article by highlighting both sides, they picked just the negative. Obvious fodder for those that rely upon media articles to gain their knowledge rather than actual facts.

TBeckett100

i did attend the session run by Fidelity on the above topic presented by Kennedy and it concerned me how deep we should view the individual tax treatments. It only takes one client to work out the bond was a bad idea and it will be another bank charge scandal.

TBeckett100

also, on the comm thing, assume your client was 80, would you take it upfront or on the drip.....

dunstonh

TBeckett100 wrote: »

i did attend the session run by Fidelity on the above topic presented by Kennedy and it concerned me how deep we should view the individual tax treatments. It only takes one client to work out the bond was a bad idea and it will be another bank charge scandal.

It wont happen. As long as you have shown on file that you have investigated and reviewed both options and your elimination reasons are valid then you are fine. The CGT changes only came in this April. So, only recommendations from about December last year would be hit by that.

Plus, life funds tend to outperform the unit trust fund on equities in a falling market with the reverse being the case in a growth market. Fixed interest funds have virtually no difference. If you have used these bond vs UT calculators you will find that for a good many, the differences are negligible. Often one is better for so many years then the other takes over at a crossover point. I have found that the large value, low cost investments heavy in fixed interest funds are consitently better in an investment bond than a unit trust. High equity content better in unit trust.

Any adviser that has failed to analyse both options is just asking for trouble and they should have been doing comparitive costings as a matter of course for many years now. Until this year, there was little difference though so its unlikely to result in a problem unless they continue to bury their head in the sand and ignore it.

also, on the comm thing, assume your client was 80, would you take it upfront or on the drip.....

My charges are on my IDD. I dont pick and choose who I offer them to. Plus, 90% of my business goes into unit trusts so its not really an issue for me.

However, where there was no charge difference to the client I would see no problem with an adviser taking upfront rather than drip. If it doesnt impact on the client then it doesnt really matter as long as the adviser fulfills their oblgations.