Investment Bonds

Supernova

Hi,

Have been advised by an IFA to invest £25K in a Select Investment Bond from Canada Life - 50% UK Property (no management fee) 50% Defensive Managed (.163% fee) as I've been identified as a cautious guy I guess. .8% bonus added every 5 years. His commission is £1250

I know you're not allowed to recommend specific products but is an Investment Bond a good idea? Are there any advantages over any other way of investing?

I'm 47 and I need something to provide better growth than savings rates over the next 15 years, say.

Thanks for any advice.

M

Chrismaths

Very bad value Mus. He's taking 5% commission which marks him down as a bond flogger. Name and shame please.

Have you used your ISA allowance yet? You can invest £7,000 per year into these and they are tax-free.

If you have, there may still be better options (and better IFAs) than this.

Need to know a bit more about you though. what is your tax rate? Do you need an income from the investment? Tell me your story and I'll try to help.

Supernova

Thanks Chris,

OK, I have a £24K mini-cash ISA with the Abbey but £7K still remaining for this year. I have £50K in Cahoot's recently reduced Savings account and £5K in current. I have a £56K endowment mortgage due to mature in 6.5 years with a £9K-£19K projected shortfall - I'm on variable 1% above base. I have about £125K in various pension funds with corporation retirement due in 13 years at 60 assuming they don't offload me. Also an old final salary scheme with £7.5K per year due at 65 (or £4K at 60). I earn £xxK.

I have no shares apart from about £4K of my company's stock and some FP windfall shares.

At the moment I have an inkling that I might be on course for about 50% of what I need in retirement.

That's my story in a nutshell!

M

Deemy

Your doing pretty well !

£54k , £125k pension pot ,7.5k per annum, do you work in the public sector ?

dunstonh

Investment bonds can be cheaper than Unit trusts/OEICs if done with the correct advisor and the correct company.

Canada Life currently have a special offer running on commission and unless you are getting this rebated to you, then there is little or no reason for you to use them.

There can be tax advantages for using an investment bond over a unit trust/oeic/SIVAC but there can also be disadvantages depending on your tax position. Higher rate taxpayers (or borderline) are usually better off with investment bonds if it likely they will be a basic rate tax payer in future. Also, trusts can be used with investment bonds which is not the case with ISAs or OEICs.

Whilst I am not as quick to judge to an opinion of the advisor as those above, the fact you are a higher rate taxpayer at this time does suggest that the right tax wrapper (investment bond) was recommended. Although the ISA should be used first. The provider and funds though would not be my choice.

Chrismaths

Thanks Mus.

An investment bond does have some advantages for a higher rate taxpayer, but not as much as an ISA! An investment bond pays 20% tax on income and gains within the bond, which satisfies your basic rate liablity - which assuming you were to cash it in once you retired and were a BR taxpayer is ok. But in an ISA you pay no tax, and you have no limits on how much you withdraw. You should always use your ISA allowances before considering an investment bond.

I don't think the benefits in this case outweigh the costs (your 'advisor' will also be making an ongoing commission from the bond remember). First thing to do is to use your ISA allowance this year. Given you have a large amount of money in cash, I'd use a maxi ISA rather than any more cash ISAs. We'll come to what to invest in later. This leaves you with £72k in cash - 24k in cash ISAs, and keep your £5,000 as a float. This should leave you with enough for an emergency fund*, leaving £43,000 to do something with. You're getting around 4.75% gross, which is 2.85% net. Not great - which is probably why the guy recommended an insurance bond, despite the fact he wanted absurd amounts of money. I'd consider making a contribution to one of your pensions, as you'll get 40% tax relief on it, and the investment will roll up tax free. You'll also be able to access the t-f cash in 8 years time should you need it - assuming you are willing to give up access to some of your capital for a while.
You've said you're falling short of what you need in retirement, so this is one way to boost it. I'd get your pension arrangements reviewed by a decent financial planner - one who offers you a fee option ideally.

I don't know anything about your attitude to risk, so I can't really recommend any investments (and it's what I get paid for ).

dunstonh - no evidence of commission bias here then?

And why would Mus need trusts after Gordon's raid?

dunstonh

I don't think the benefits in this case outweigh the costs (your 'advisor' will also be making an ongoing commission from the bond remember).

That is possibly incorrect as far as generic nature of bonds goes. Investment bonds can be quite cheap now and its very easy to get a range of the top unit linked funds (inv perp, jupiter etc) and end up with a reduction in yield over 10 years of around 1%p.a.

Investment bonds used to be quite expensive but modern contracts do not need to be and its very easy to look at some of the expensive contracts from the past (or the worst examples available today) and say they are all like that when it is not the case.

dunstonh - no evidence of commission bias here then?

If he hasnt rebated any commission back then its possible commission bias. If some of the commission has been rebated back then it isnt. Canada Life are paying 7% commission as default so if hes taking 5% ONLY, then he is rebating 2% back.

Either way, Canada Life would not be my choice of provider as you can get cheaper and get a better range of funds (although Canada Life do have the odd good fund in a few sectors). That being said, they are not the worst by a long shot and the advisor hasnt recommended anything bad although I would like to see his justification for not doing £7k ISA and 18k bond. If he hasnt allocated any funds for the ISA, then walk away now and find a new advisor.

And why would Mus need trusts after Gordon's raid?

You cant really do any trust work at this time as the situation is still unknown.

defender_of_the_weak

Why not use some of the funds to reduce your mortgage debt, this gives the equivalent of a tax free return guaranteed for every year remining on your mortgage. No commission and assuming you are not locked in to a super low rate mortgage a better rate of return than ordinary savings on deposit.

On a completely separate note, as long as their advisers like yours around I will still be in business for years mopping up behind them, when will some advisers look beyond the investment bond as the panacea to all investment requests?

dunstonh

On a completely separate note, as long as their advisers like yours around I will still be in business for years mopping up behind them, when will some advisers look beyond the investment bond as the panacea to all investment requests?

Ignoring the ISA not being mentioned at this stage, what is wrong with the investment bond recommendation in this place? Nothing as far as I can see. The OP is a higher rate taxpayer who will be a basic rate tax payer in the future. This places investment bond above UT/OEIC/SIVAC but below ISA.

Although I do agree that some do over sell them when UT/OEIC/SIVAC are more appropriate and are just asking for trouble. Although I dont see the compensation levels that possible would apply being much. Larger investments tend to also favour investment bonds (after ISA) rather than UT etc leaving you with only the smaller bonds. The difference in taxation between bond and UT is therefore very small at around 0.2% per year. So, a 5 year bond of £25k could yield £250 if complaint upheld. Although with modern charged bonds able to beat the same UT funds over 10 years on reduction in yield (usually by more than 0.2%) then its easy to justify bonds being better. Of course, if the advisor goes on recommending the expensive bonds like AXA, Canada Life, Skandia, Sterling etc, then they cannot use the charges advantage as those are more expensive. They would have a hard job supporting their case.

Chrismaths

***Small warning before you read my post - Several beers consumed so advice may not be ideal***

Dunstonh - I accept that the idea of an investment bond here isn't necessarily unsuitable advice - as I think my post said. However, there is one allowance (or exemption) that hasn't been explored here - Mus has £8,500 (or whatever it is this year) of CGT allowance. If he (sorry for the 3rd person, Mus, I'm talking about you, not to you ) is genuinely 'low risk', then what about a decent ZDP? You can get about a 6% redemption yield on the things, with hurdle rates of around -26%. If he buys a set with different maturity dates, and then tops up his ISA each year with the proceeds, he can pay ZERO tax, not 20%. There is no real need for an IBond in this case.

And that people, is why you need Investment Managers!!

Ok, I promise no more plugs for a while Have a good weekend all

Busy_Welsh_Mum

Please, new to this chat room business hence not sure if in correct part of forum for this. But got some good www link to compare my unit trust performance the other day here. So wonder if anyone can point me in the direction of www link to see how my NDF top tracker ISA is performing?