Monthly income from £140,000

EdInvestor

OK, let's go through this again.

The return on investments in the funds within the bond comes in the form of a) dividends and b) capital gains.

A basic rate or non-taxpayer does not pay any tax on dividends and has a annual capital gains tax allowance of approximately 9k a year.

However within the investment bond, all gains will be taxed at 20%.

Thus the OP's Mum will lose 20% if she uses the bond compared with not using it. That's even before we look at the additional charges.

Now the bond enables you to withdraw 5% annually "tax free". This money actually comes from your capitalnot your income.

So to obtain her 5% tax free without using the bond, she just cashes in 7k of her investments, which will come within the capital gains tax allowance and thus will be tax free. She can take a bit more if she likes, and it's still tax free.

Use of the bond forces her to pay tax of 20% on her profit and her profit will be lower as the charges will be higher. Non-use of the bond means she pays NO tax and makes more money through lower charges.

THis is why the bond is an unsuitable wrapper for this investor.

dunstonh

However within the investment bond, all gains will be taxed at 20%.

In reality it is closer to 10-15% as not all gains are taxed.

Now the bond enables you to withdraw 5% annually "tax free". This money actually comes from your capitalnot your income.

You may call it tax free. No-one else does. The fact it is classed as withdrawal of capital is highly beneficial as that can't be taxed as income or classed as income.

Use of the bond forces her to pay tax of 20% on her profit and her profit will be lower as the charges will be higher. Non-use of the bond means she pays NO tax and makes more money through lower charges.

As usual, you choose to ignore many of the points and repeat the same incorrect information again and again. Charges do not need to be any higher and can easily be lower than unit trust and oeics. With tax in reality being closer to 10-15%, that puts it very close to unit trust taxation and in reality hardly enough to worry about.

EdInvestor

Dunstonh is wrong about tax fro those on basic rate.

Readers may additionally be interested to see the typical charges levied on an investment bond.

If this doesn't turn you off,nothing will. Note these charges have nothing to do with the advisor, this is what the life company is charging.

dunstonh

Dunstonh is wrong about tax fro those on basic rate.

I am not wrong. 20% is the maximum but not all assets in the investment funds pay that amount. Especially lower risk income generating investments. This brings the tax down to 10-15% behind the scenes.

Readers may additionally be interested to see the typical charges levied on an investment bond.

Again, notice how Ed is ignoring facts by picking a website that generically explains different potential charges that may appear. Giving the impression that all of those are charged. In reality, they are not.

Example, £120k invested 24th August in a non-stockmarket range of funds (low risk investor). The provider gave 107.75% initial allocation (compare that to the 97% in that website Ed linked). This means the investment had £9300 added to it straight away. No bid/offer spread was present. The reduction in yield (which is how you measure charges over a period) was just under 1% making it considerably cheaper than a unit trust/oeic. A similar investment of £100k made june last year is now standing at £115,000 as well as paying out just over £8000 set up as a regular monthly payment. No tax liability to the individual, no impact on age allowance, no impact on pension credit if that was applicable and the local authority cannot take it into account if local authority care is ever required. It does exactly what it needs to do and is doing it very well and very cheaply.

If this doesn't turn you off,nothing will. Note these charges have nothing to do with the advisor, this is what the life company is charging.

Going to a website that lists potential charges and gives a couple of examples is not a satisfactory way to make a judgement about a product.

Ed, you keep ignoring My comments on your selective promotion of low cost wrappers. SIPPs are generally the most expensive form of pension. Yet you promote low cost SIPPs in the pension forum. In here you promote low cost ISAs. Why is it that with investment bonds you promote the most expensive possible versions that could ever exist? What is wrong with low cost bonds?

EdInvestor

Perhaps you would like to provide an example of a low cost investment bond. The link to discount broker Chartwell's offer is the only one I have found so far.

https://www.fsa.gov.uk/tables

gives examples of many investment bonds and none of them are what I would call even moderate cost, much less low.

And you still have not explained how paying 15-20% tax is better than paying none at all.

dunstonh

You are linking to a table that the FSA publish showing FULL COMMISSION priced products. The FSA also publish information that shows that on average advisers are taking 70% commission. There are those, such as new model advisers, that take even less (an average dictates that some take more, some take less).

If you buy an ISA off the shelf from a bank, you pay 5% initial charge. If you buy it from HL, you pay no initial charge. Yet I dont see you telling people not to buy ISAs. Indeed, you tell them to buy them from HL (same with the SIPP which is much more expensive product normally to a stakeholder or personal pension).

That example I used above for the £120k was clerical medical. I just re-did the illustration on full commission and included a number of external funds (inv perp, newton, fidelity) and it showed a reduction in yield of 1.4% over 10 years. That is lower than unit trusts with a same fund spread. So even at full commission, it is possible to come in with low enough charges. You could replace CM with Norwich Union, Legal & General and Scot Eq in this example.

If you want expensive, you could go Skandia, AXA, Prudential and any bank version of the product (i.e. Barclays L&G version is massively more expensive than the IFA L&G version).

As for distribution channels, Cavendish offer bonds cheap as do New model advisers and any IFA willing to accept business on discounted terms.

And you still have not explained how paying 15-20% tax is better than paying none at all.

And what investment product has no tax taken from it somewhere or give rise to a personal liability? Unit trusts/OEICs which would be the natural alternative to an invesment bond have tax on them which cannot be reclaimed by a non tax payer.

You also need to factor in loss of pension credit as a potential tax.

Chrismaths

15-20% tax is slightly misleading. What is important is the difference in taxation between an investment bond and (lets say) an oeic. In an investment bond, interest (on bonds, gilts etc) is taxable at 20% - identical to an oeic for a basic rate taxpayer - however if they hold gilts or corporate bonds (QCBs), capital gains on these are not taxable at all, although conversely, you can't offset losses (same as a person holding them directly). Dividends are taxable at 10% within a bond, which is again identical to a basic rate taxpayer. The only difference comes with equities (and oiecs/ut etc within an investment bond). Here, the NOTIONAL (ie unrealised gain) is taxed annually at 20% - so you don't get your annual exemption from CGT. However, the insurance company can still offset losses against gains, and carry forward losses.

So in conclusion, as a BR taxpayer the only extra tax is the notional cgt charge (not applicable if you have outstanding cgt liabilities, where there is no marginal difference).

So an example: If you have a 50/50 split between fixed interest and equities in your bond, and the equities grow (capital) at say 5% per year, yield 3% in dividends, and the interest is 5% per year gross, a total gross return of 6.5%. If you hold them directly (and you realise capital gains within your exemption) your growth is 6% pa. If you hold them in an investment bond, your growth is 5.5%pa.

The tax attributable to the notional CGT tax in this case is actually 7.7% of the gross return.

This means that if you are having your benefits withdrawn for your marginal income at a rate of 37%, the extra tax in the bond is more than offset. When you take into account care home fees (for which some bonds are excluded in the means test), it knocks holding investments directly out of the park.

Chrismaths

PS. I just found this from bestinvest. Not perfect, but not bad. It explains what tax wrappers may be suitable in certain circumstances (although it misses off the care home and benefits situations).

http://www.bestinvest.co.uk/taxplanning/product.htm

EdInvestor

Dividends are taxable at 10% within a bond, which is again identical to a basic rate taxpayer.

Outside the bond,dividends arrive with a tax credit, which pays the notional tax, and are thus effectively tax free for the basic rate taxpayer .

The only difference comes with equities (and oiecs/ut etc within an investment bond). Here, the NOTIONAL (ie unrealised gain) is taxed annually at 20% - so you don't get your annual exemption from CGT.

There is no "annual exemption" from CGT. Every year there is a CGT allowance of approx 9k. Tax is only payable on realised gains over this amount.So if you sell shares and make a profit of 8,999 pounds, no tax is payable.If you sell no shares/funds, no tax is payable.If you hold shares for a few years you get taper relief which reduces any tax payable.

It's really quite hard to have a problem with CGT.:)

Thus it's not normally sensible to put your investments in an expensive investment bond where you are forced to pay CGT on unrealised gains when you would not be paying it, if your investments were outside the bond.

dunstonh

Thus it's not normally sensible to put your investments in an expensive investment bond where you are forced to pay CGT on unrealised gains when you would not be paying it, if your investments were outside the bond.

Again, you focus on "expensive" and ignore the cheaper versions.