Asset Allocation and Bonds

EdInvestor

Endowments are subject to up to 20% insurance company corporation tax on gains, it is not split between types of gain. ISAs, and the gains on the first £25 of investments in an F/S plan are tax free.

That's the difference.

An F/S plan is on the same basis as an ISA, not an endowment. So it is worth using particularly if the money within is invested in fixed interest assets.There is no advantage for shares unless you are a high rate taxpayer.

dunstonh

Endowments are subject to up to 20% insurance company corporation tax on gains, it is not split between types of gain. ISAs, and the gains on the first £25 of investments in an F/S plan are tax free.

That's the difference.

Life companies get taper relief so the 20% is a theoretical maximum. However, I am comparing to unit trust funds (or investment trusts) which would be the typical alternative to these as I am not aware of any endowment that still exists. There is no corporation tax on those.

The similarity to endowment [with these children bonds] is because its fixed term, has up front charges and usually these plans do have a basic sum assured still.

An F/S plan is on the same basis as an ISA, not an endowment. So it is worth using particularly if the money within is invested in fixed interest assets.There is no advantage for shares unless you are a high rate taxpayer.

So why have you changed your mind on this thread? In the past you have agreed that the tax is a red herring and that they are expensive and the charges outweigh the virtual non-existent tax benefit.

EdInvestor

The problem with most F/S plans is they involve With profit funds, so the tax advantage gets eaten up by the low returns and high charges in the typical WP fund. If the F/S offers a low charge tracker or other decent unit linked fund, it may be more worthwhile.

EdInvestor

dunstonh wrote: »

So, its an endowment. And expensive and low quality as well. What made you buy that?

No, as mentioned above, its not a bond. The bond in the name of the product is just a marketing name to make you think its something other than an endowment policy (so something very similar to an endowment).

Actually you were comparing the plan with an endowment.Hence my comment.

dunstonh

Actually you were comparing the plan with an endowment.Hence my comment.

in post #10 I said it was "...something very similar to an endowment". (which it is, front loaded charges, fixed term, use of with profits fund, usually has basic sum assured...). The way they work is very endowment like.

Taxation references started in post #12 and were not compared to life funds/endowments. The taxation comments have all been standalone answers or where they have been compared, they have been against UTs/ITs.

If the F/S offers a low charge tracker or other decent unit linked fund, it may be more worthwhile.

That would have no real tax advantage though. A tracker would be no different to holding unwrapped as a UT/IT (unless higher rate taxpayer). You would want a low cost corp bond fund or fixed interest fund to get the tax benefit as well as a the lower cost benefit.

sva19

jamesd wrote: »

No. It's too cautions to fit a really aggressive stance.

With a fifteen year timespan an aggressive mixture would be dominated by emerging markets, natural resources funds and Asia-Pacific. The truly very aggressive might be all in emerging markets. You're a bit too much in the developed markets for that. It's still quite high on the risk and potential growth front, though. I'd personally cut back on the UK, Euro and America portions and up a corporate bond (not with profits bond) portion for rebalancing into when the markets are doing well. But that's me and a quite aggressive approach for a 15 year timespan.


If you're limited to fixed monthly contributions you can't rebalance into or out of it as you'd want to with a real corporate bond holding, so you can make money from the ups and downs of the markets (buy more during ups, sell to buy equities after drops). So it's not hugely useful to your plan and for an aggressive plan it's just a drag on performance.

Can you help me understand whant you saying above, have funds in corporate bonds for rebalancing the portfolio, and sell the bonds when equity is doing well and, do opposite sell equities and buy bonds when equities not doing well?

Lokolo

sva19 wrote: »

Can you help me understand whant you saying above, have funds in corporate bonds for rebalancing the portfolio, and sell the bonds when equity is doing well and, do opposite sell equities and buy bonds when equities not doing well?

If you work in percentages so say for examples sake 50% equities 50% bonds. After 1 year it could be 70% equities, 30% bonds (maybe equities have gone up loads, bonds gone down,whatever). You want to get back to 50% 50%, so you will sell 20% of the equities, and with that, buy more bonds.

jamesd

sva19 wrote: »

Can you help me understand whant you saying above, have funds in corporate bonds for rebalancing the portfolio, and sell the bonds when equity is doing well and, do opposite sell equities and buy bonds when equities not doing well?

Not quite. One common way of doing this is called rebalancing. That's restoring the percentage values to the ones you started out with whenever they drift more than say 5% away from the initial values. This will cause you to sell equities and buy bonds in equity boom times and do the opposite in bust times for equities. That in turn means that you can make a gain from the normal ups and downs of the market, perhaps 1% or so extra growth per year on average. It's effectively causing you to sell equities when their prices are high and buy them when they are low.

Pretty much the opposite of what you wrote, which is what ordinary consumers tend to do, causing them to lose money by buying high and selling low.

It's hard emotionally to buy when prices are low and part of the purpose of rebalancing is to get people to do it even when it's uncomfortable. The ideal times to buy equities are when it's the toughest time to buy, with doom and gloom everywhere. Just when nobody wants to be doing it.

dunstonh

Rebalancing portfolios is important as over time the portfolio will go out of sync with your intentions. Typically, this means it will become higher in risk (on the basis of higher risk areas performing more than lower risk). So this would make the portfolio more volatile than you wanted at the start.

The use of lower risk fixed interest securities has the effect of counter balancing the higher risk areas but also acting as a safer area to rebalance your gains into (as James says).

sva19

Thanks for the above, useful information. Typically what % of portfolio do people allocate to Bonds, so they have sufficient funds in their to take advantage of equity fallouts?