Investment Bond disclosure

kevinsheehanuk

I am considering moving money from a Legal and General investment bond for a better interest rate from another provider. The representative of Legal and General advises that their bond is advantageous to me because:-
1. I do not have to declare the bond in any form of means testing
2. The bond can be "hidden" from the Inland Revenue for tax purposes
3. The local council do not need to be informed of this bonds existence when applying for residential care/assistence for the elderly
4. With profit bonds from other providers do not have these advantages

Anyone out there care to comment

dunstonh

I am considering moving money from a Legal and General investment bond for a better interest rate from another provider.

The legal & general investment bond doesnt pay interest. It allows you to invest in hundreds of investment funds (typically the ones you get all all bonds as well as their own in-house funds).

The representative of Legal and General advises that their bond is advantageous to me because:-

Note: tied reps are not allowed to recommend cancellation of their products. So, whilst they are correct in most of what they say, they would still say that even if there was better elsewhere. It is also clear that you are being told some porkies by this rep as well. Another restriction of tied reps is that they are not allowed to discuss the products of other providers beyond generic information.

1. I do not have to declare the bond in any form of means testing

correct. As long as you are not taking an income from it.

2. The bond can be "hidden" from the Inland Revenue for tax purposes

That is unlawful as you word it. However, that may just be wording. As long as you dont exceed 5% p.a. withdrawals, you do not need to report it to the HMRC on any tax return,

3. The local council do not need to be informed of this bonds existence when applying for residential care/assistence for the elderly

Correct. As long as income is not being taken from it.

4. With profit bonds from other providers do not have these advantages

Complete rubbish. The rules apply to the investment bond tax wrapper and any provider offering this tax wrapper gets the same rules applied to them. It doesnt matter if its L&G, Aviva, Standard Life, Friends Provident or whoever.

What are you doing getting advice from a tied sales rep? Expensive way to do it and the L&G product isnt the best out there.

kevinsheehanuk

Dear Dunstonh

Very impressed by your quick response and informed advice - excellent

Is it being suggested that when the question " do you have any savings" on any application form, one is able to not mention/declare that you have an investment bond or is it being suggested that you must declare an investment bond and claim exclusion/exemption of this bond from the means testing/application or whatever assistance/ tax return you are applying for

Is an "investment bond" the only financial instrument that provides this facility for excluding you from having your savings assessed as part of your assets.

Is the distinction we are discussing here related to whether the interest on the capital is paid as an income or as a capital appreciation at the end of the investment bond

Presumably a capital appreciation means capital gains tax applies

Your point about independent advice is well taken and having been gifted this bond in L&G I started to question its suitability. It became immediately obvious that it was not getting the best return on investment

Thus I find myself here getting further and better particulars

I am about to invest considerable funds for long term fixed interest and any advice is much appreciated. We may be arguing semantics here but the devil is in the detail

Macster1

I've just asked a question on another thread about some places offering a cashback on the investment. How can they do this?

EdInvestor

Although it is primarily an investment, an investment bond is officially classified as an insurance policy.

Thus it is given a concession when councils and the DWP assess your entitlement to benefits or to obtain help in paying for long term care.The capital assets within the bond are not counted for this purpose.

If however you take part of the capital as income every year (5% is typical), this will be counted as with the interest on ordinary savings.Tax is not relevant.

Well done for already working out that what you save on having your capital ignored can easily and quite quickly be overcome by other factors.These bonds are often blighted by poor performance caused by high charges and commissions payable upfront, and low quality fund choices.

Another factor which bamboozles many a customer is the claim that the bonds pay out a 'tax free income'.This is not 'income' but simply a withdrawal from capital.Like taking your money out of the bank account to pay living costs.

You have to hand it to the financial industry for inventing investment bond packages, which generate extensive profit, but appear to have been constructed out of thin air!

dunstonh

Is it being suggested that when the question " do you have any savings" on any application form, one is able to not mention/declare that you have an investment bond or is it being suggested that you must declare an investment bond and claim exclusion/exemption of this bond from the means testing/application or whatever assistance/ tax return you are applying for

Technically, an investment bond is a single premium, whole of life assurance. So, by definition it is a life assurance policy. That is how it avoids being included in the means test. If declared the assessor for means test should not include it. Whether you choose to declare it or not doesnt really matter as its not something that should be included unless an income is being taken.

Is an "investment bond" the only financial instrument that provides this facility for excluding you from having your savings assessed as part of your assets.

endowments are another one because of the life assurance element. Indeed, it was endowments that caused this exclusion to come about. Although you cant, rightfully, get endowments nowadays.

Is the distinction we are discussing here related to whether the interest on the capital is paid as an income or as a capital appreciation at the end of the investment bond

Forget interest as interest doesnt apply to investment bonds. It is withdrawals that matter. Not whether the value has gone up 3%, 30% or 300%. If you take money out then that is what is considered.

Presumably a capital appreciation means capital gains tax applies

There is no personal CGT liability on investment bonds. Tax is paid within the funds on growth at a technical maximum of 20%. However, life companies still get taper relief. So, the realistic tax level is closer to around 13%.

Your point about independent advice is well taken and having been gifted this bond in L&G I started to question its suitability. It became immediately obvious that it was not getting the best return on investment

Most bonds allow access to a wide range of funds. Some are indeed full whole of market as you get with ISAs and other tax wrappers. So, usually its not the bond that makes or loses money, its the investments you hold within it. The IFA versions of the L&G bond have fund supermarket level of investing (hundreds of funds to choose from). The tied version may be cut down from that.

I've just asked a question on another thread about some places offering a cashback on the investment. How can they do this?

IFAs do it all the time. You agree a fee for the advice and any commission is rebated. A common method is to agree a level of fee and use the commission to pay that fee with any surplus being rebated.

These bonds are often blighted by poor performance caused by high charges and commissions payable upfront, and low quality fund choices.

Which isnt really applicable nowadays. Most bonds have wide ranges of funds, charges are often lower and the commissions no different.

Another factor which bamboozles many a customer is the claim that the bonds pay out a 'tax free income'.This is not 'income' but simply a withdrawal from capital.Like taking your money out of the bank account to pay living costs.

The withdrawal that way is for tax purposes. Any income generated in the investments is reinvested. So, it is like draying money out of your bank account but of course your bank account gets topped up with interest. The investments get topped up with investment returns and distributions within those investments.

ou have to hand it to the financial industry for inventing investment bond packages, which generate extensive profit, but appear to have been constructed out of thin air!

I am sure HMRC, who set the tax rules, would disagree with you on who decides the tax laws.