with profits bond

moneytroll

Occasionally, I come across posts that mention that with profits bonds are a good vehicle for a diversified portfolio.
If this is true, could somebody explain to me why these products are at all beneficial?
I was sold an offshore with profits bond with clerical medical 5 years ago from my bank and the performance has been less than mediocre. The MVR is guaranteed to be removed only after another 10 years and I am thinking of cashing it in.
However, this bond represents approx. 18% of my overall assets and if somebody could point out the possible benefits, maybe I will stick with it for another 10 years for its diversification benefits (if there are any).
The other thing i wonder about is whether the bond can be converted into another offshore bond investment (with UTs/OEICs in it), without entering onshore first (so that if there is any gain, I wouldn't have to pay tax on it, yet.)
Grateful for any comments.

missile

Seems like you were sold a lemon. Why an offshore with Profits Bond? Do you have overseas cash that you need to hide from UK tax man? I hope you are aware of the changes in regulations which mean that he may well find out about any overseas next egg you may have? As far as I am aware most with Profits Bonds are structured so that they are TAX free, or to be pedantic tax paid i.e. you should have no additional liability. However depending on your other circumstances you may become liable.

Have you asked your bank? or is that a silly question?

IMHO, you need to look at the current value and projected growth before considering whether to cut your losses.

moneytroll

missile wrote:

Do you have overseas cash that you need to hide from UK tax man?

it just happened that after a brief risk assessment (I wanted 'low risk' at the time + had no clue about investments), the w/p bond was highly recommended by the bank and it just happened to be offshore. The reason i wonder whether it can be converted into another offshore bond investment without entering onshore is because I am likely to be higher rate tax payer for the next few years and wanted to defer tax, rather than evade it!

missile wrote:

As far as I am aware most with Profits Bonds are structured so that they are TAX free, or to be pedantic tax paid i.e. you should have no additional liability. However depending on your other circumstances you may become liable.

You sure about that? I suppose if it works like UTs/OEICs then the basic rate tax is taken out at source (but i am not sure whether it is the same with offshore bonds).

missile wrote:

Have you asked your bank?

Not yet, as I want to get clued up first on the options, before the bank sells me another bunch of 'lemons'...

missile wrote:

IMHO, you need to look at the current value and projected growth before considering whether to cut your losses.

that is tricky because the products are complex and there are some kind of exit bonuses and the unpredictability of MVRs (which may or may not be applied for no logical reasons) which makes it hard to know what the value will be from year to year.

I am not even sure what these things are usually invested in. As I mentioned, some people here think these products are not bad for overall diversification purposes and if somebody could point out the possible benefits (if there are any) from these products, it would be very appreciated.

dunstonh

With profits funds are mostly obsolete now. Although there are pockets of people where the fund can still be very good value and spot on for their goals providing the right provider is used.

Clerical Medical's IFA version of their bond has multiple funds available within it and switching is allowed. You may find that an annual switch over to alternative funds within their MVR allowance is a good course of action. Banks that sell branded products often have cut down versions rather than the full retail version that IFAs have. So, its something you will need to check out first.

moneytroll

thanks for your comments. i didn't know there are several varieties of funds available.

"Although there are pockets of people where the fund can still be very good value and spot on for their goals providing the right provider is used."

could you possibly specify one example where a w/p offshore bond would actually be suitable?...

moneytroll

PS: Are these bonds actually good for downside protection? - hence their 'low risk' description? It will be silly if I take it out now, while the growth market growth has slowed and find myself allocating it to mainstream UTs which, during these volatile times, will exibit high volatility and possibly turn out the wrong investment decision at the wrong time...

dunstonh

could you possibly specify one example where a w/p offshore bond would actually be suitable?...

In the past, they would have been useful for IHT estate planning where the donor wanted the capital secure. As death is the only time these would be surrendered, things like MVRs are not an issue.

Thanks for your comments. i didn't know there are several varieties of funds available.

Investment bonds generally have access to the most popular unit trust funds and in some cases actually invest directly into the unit trust funds. The current CM (IFA) offering has the following features:
You benefit from discounts on initial and ongoing charges negotiated with leading fund managers
You have access to the funds of over 170 international investment groups
You have access to our range of nine managed funds
You can switch between Clerical Medical funds free of charge.

EdInvestor

What is the current MVA on the bond?

What are the anniversary penalty free withdrawal dates?Is there are a maturity date?

How much of the capital can be withdrawn annually free of MVA ( it's usually 5% but can be more)?

How is the bond performing?Do you have any maturity projections?

What is the surrender value?

A WP bond has many things in common with an endowment.Post some figures so we can take a view on whether it's worth keeping on with it.

dunstonh

Ed, in this case there are tax issues to be concerned with and switching within the bond would not give rise to any tax liability (one of the advantages of investment bonds over unit trusts). So, whilst your list of questions is data that should be considered of course, tax could play a big part here.

EdInvestor

Sure but the OP said

I am thinking of cashing it in.

What kind of tax liability are we talking about on a loss making bond?

EdInvestor

Useful calculator for tax liability and explanation of how tax applies

Comparison of onshore vs offshore bonds

Interesting to note than income (ie dividends) are charged at 22% within the wrapper.They are charged at nil outside the wrapper.

Better to avoid this wrapper then.[And I haven't even mentioned the charges.......:( ]