With-Profits Bond with Clerical Medical

Geoffo_M

7 years ago, I made the mistake of investing £15k in a with-profits bond with Clerical Medical. The performance has been unremarkable and I have been drawing 5% annually. As there is still an MVA in force (5%), I was planning to wait until the 10th anniversary (when the MVA doesn’t apply) to cash in. Clerical Medical have now offered its with-profits holders the opportunity to transfer into its other funds, and this seems too good an offer to refuse. (One of them is Invesco/Perpetual’s Income, which has a good track record). The downside is that I would lose any terminal bonuses and would also be burdened by the MVA.

Can anyone think of any aspects I haven’t thought of? And if it is a good idea, what would be the difference in cashing it in completely and not staying with Clerical Medical. I could still invest in a unit trust through HL and benefit from their discounts.

Any opinions would be appreciated.

Geoff

oldfella

I would look very carefully at the costs of buying and holding a unit trust under Clerical Medical.

you can get trailing commission refunded and no upfront fees via a discount broker

dunstonh

CM's investment bond is actually a very good product. It has low charges and whilst the fund range isnt the largest on offer, it is geared to the more cautious investor.

It has a number of the funds you would want on any investment and you are able to build a suitable portfolio within the bond.

what would be the difference in cashing it in completely and not staying with Clerical Medical. I could still invest in a unit trust through HL and benefit from their discounts.

Unit trusts and investment bonds have different tax positions and different pros and cons. You could pay more or less tax depending on your circumstances. You could pay more or less in charges as well (some of the CM charges are less than 1% a year).

I would look very carefully at the costs of buying and holding a unit trust under Clerical Medical.

CM dont offer unit trusts.

Geoffo_M

dunstonh wrote: »

CM's investment bond is actually a very good product. It has low charges and whilst the fund range isnt the largest on offer, it is geared to the more cautious investor.

It has a number of the funds you would want on any investment and you are able to build a suitable portfolio within the bond.

I value your opinion dunstonh. To summarise - you think its a good idea to transfer from the with-profit bond (losing terminal bonus and incurring MVA), but stay within the CM wrapper ie not sell-out completely?

Geoff

dunstonh

Getting out of the with profits with CM with only a 5% MVR is a good move. You have the potential to make that 5% up within 6 months. Staying in the with profits fund will see you have another poor year. Basically, you are taking one step back to go two steps forward.

Whether you should leave the bond itself would depend on your personal position and whether any of the benefits of the bond tax wrapper are suited to you or not.

There are a number of areas where bonds are a good option. I will list a few of the main ones and you can see if they apply to you or not:

1 - Higher rate taxpayer
2 - Coming up to age 60 in next 5 years and likely to be on pension credit.
3 - age 65 or over and income close to or over £20,900
4 - nursing care costs a concern
5 - on means tested social security benefits
6 - investments part of a trust arrangement to reduce inheritance tax.

If any of those apply to you, then the investment bond tax wrapper could be better than the unit trust tax wrapper. In which case a fund switch would be better than exiting and going with unit trusts.

My other reference was to cautious. CM are good at cautious funds. Their lower risk funds dont tend to top performers but they do iron out a lot of the volatility and many people are willing to sacrifice the increased potential for stability. If you fit into that then CM have some good funds. Many of which are at 1% annual management charge. That can make them cheaper than the typical 1.5% that you see on unit trusts

EdInvestor

Geoffo_M wrote: »

Clerical Medical have now offered its with-profits holders the opportunity to transfer into its other funds, and this seems too good an offer to refuse.

Surely you have had access to alternative funds all along?Is this offer perhaps related to a new offer of external funds?

Almost certainly you would be better to cash in the bond and then invest in these higher quality funds via a discount broker, with the first 7k of the money in your maxi |SA and the second held direct, and added to the ISA next year.

That way you won't pay any tax (if you are on basic rate) unlike in the bond, and the charges will allso be much lower as well.

dunstonh

Surely you have had access to alternative funds all along?Is this offer perhaps related to a new offer of external funds?

The current CM bond has access to both with profits and unit linked and did from launch. I cannot recall if the previous version did.

Almost certainly you would be better to cash in the bond and then invest in these higher quality funds via a discount broker, with the first 7k of the money in your maxi |SA and the second held direct, and added to the ISA next year.

And what facts do you know about Geoffo to make that recommendation?

That way you won't pay any tax (if you are on basic rate) unlike in the bond, and the charges will allso be much lower as well.

Thats not true though is it.

Charges are likely to be lower when using internal funds (1% compared with 1.5% typical unit trust funds).

Both investment bond funds and ISA funds still pay tax on distributions and get the same tax credit. Only on capital growth is there a difference where the fund manager may have to pay capital gains tax. However, if you stick with income funds, there will be little or no CGT paid within the fund. Life funds can be as much as 1.2% a year average worse off than unit trust funds but can be as little as 0.1%.

You wouldnt have £7k in a bond so full surrender would then mean using unit trusts for some of the money and these could give rise to far more costs than the low charges on a CM bond.

We dont know enough to say.

Geoffo_M

I also thought that we had a say in which region our money was invested but in March I received a letter from CM:-

"NEW FUND OPTIONS NOW AVAILABLE ON YOUR WITH-PROFITS BOND

You can switch into one or more of the investment funds. We've over 60 funds from six carefully selected managers to choose from. Your bond now gives you the flexibility to change your investment if your objectives & attitude to risk change. If you decide to switch out of the With-Profits bond you must switch all your investment. You can switch back in the future if you want to. If you switch out before the MVR free option date, you will lose this option completely."

My personal circumstances are that I am 59 and (probably) decide to retire having been made redundant 6 months ago. I am drawing 5% from the bond (tax free) as I am with another larger bond (it's the CGU/Norwich Union which obviously I don't want to touch) and interest from building societies that comprise of my income.

I want you to know that I appreciate the time you guys are giving to express your opinions.

Thanks - Geoff

dunstonh

Will you be receiving pension credits Geoffo? (investment bonds are exempt from the means test for pension credits)

Will your income be close to or above £20,900 from 65? (regular withdrawals from bonds do not count as income for tax purposes so can keep you below the age allowance reduction).

Geoffo_M

dunstonh wrote: »

Will you be receiving pension credits Geoffo? (investment bonds are exempt from the means test for pension credits)

Will your income be close to or above £20,900 from 65? (regular withdrawals from bonds do not count as income for tax purposes so can keep you below the age allowance reduction).

No dunstonh, I do not qualify for pension credits. At 65, I anticipate my gross pension income and net interest income will total around £27K.

Geoff

dunstonh

If you took out the gross interest income, would it fall around the £21k mark?

Above £20,900 (in this tax year) is when the age allowance gets reduced at a rate of £1 for every £2 over £20,900. Interest goes towards that. Investment bonds do not.

If you are well through that mark, then investment bonds are not going to offer you any tax saving over unit trusts. That said, I would have to check the age allowances for the next few years to see if the budget changes are pushing up the age allowance limit (the £20,900) by a larger amount than normal.