Question about Investment Bonds

moneyandmountains

Hi

I have a question about investment bonds, relating to my father's circumstances.

He is a Higher Rate Tax Payer
likely to be higher rate in retirement (around 5 years)
All ISA allowances already used.

Elsewhere on this board, investment bonds have received quite a slating for high charges, and the tarnish associated with the performance of with profits bonds.

Are there any decent bonds around that would allow selection of the funds that are within the wrapper?
Do these tend to be better / more expensive than the traditional types of with profits investment bond?

I have seen both onshore and offshore bonds mentioned. Can anyone tell me the tax difference between these?

Note: He is likely to sort this out through an IFA, but it is useful to know whether they are telling the full story.

Cheers

moneyandmountains

dunstonh

Elsewhere on this board, investment bonds have received quite a slating for high charges, and the tarnish associated with the performance of with profits bonds.

Which completely inaccurate and why tarnish a tax wrapper because of the performance of one particular fund that is also available in ISAs. You dont see ISAs being tarnished the same way.

Are there any decent bonds around that would allow selection of the funds that are within the wrapper?

Yes.

Do these tend to be better / more expensive than the traditional types of with profits investment bond?

You are comparing apples and oranges. or cars and petrol. The investment bond is a tax wrapper. It is not an investment. The with profits fund is an investment fund. They are two different things.

If you place Invesco Perpetual High Income fund in an investment bond, an ISA, unit trust or pension then the rate of return will be identical in all the tax wrappers. The only difference is the tax and charges. You use the tax wrapper that is best suited.

I have seen both onshore and offshore bonds mentioned. Can anyone tell me the tax difference between these?

At the end of the day, there is little in it although offshore bonds can benefit from gross roll up over a period but you have to be careful that the charges dont eat into the tax saved as offshore bonds can be more expensive (note the can be as they are not all expensive). If he is still going to be a higher rate taxpayer then the tax is not avoided. It is just deferred. (noting that there is going to be a bigger jump for over 65's next year in income required to be higher rate).

moneyandmountains

dunstonh wrote: »

You are comparing apples and oranges. or cars and petrol. The investment bond is a tax wrapper. It is not an investment. The with profits fund is an investment fund. They are two different things.

Cheers. The information is much appreciated.

I realise that, but it seems that many of the investment bonds around are tied up with some crummy old fashioned investment fund.

I notice that Skandia offer an investment bond which allows a selection of their life funds to be put in it.
Are there any other providers that do this?

It seems places like NU and Liverpool Victoria are tied up with with profits/distribution funds.

I have seen mention of being able to to take a 5% income out of an investment bond without tax implications. Is this just for basic rate tax payers?

It seems that the investment bond is a bit like the tax deferral of a pension (without the 25% tax free sum), apart from the death benefits. I presume that this would give a flexibility greater than income drawdown in a pension, especially for a widow paying basic rate tax. (assuming the higher rate taxpayer died).

dunstonh

I realise that, but it seems that many of the investment bonds around are tied up with some crummy old fashioned investment fund.

They are with profits bonds though and not unit linked bonds. Its a bit like saying that Peugeot make poor quality cars so all cars are poor quality.

It should also be noted that not all with profits bonds are bad. I have some left on my books which are performing in excess of 10% a year. So, for a contract with some guarnatees on it, that isnt bad at all.

I notice that Skandia offer an investment bond which allows a selection of their life funds to be put in it.
Are there any other providers that do this?

Virtually all investment bonds are unit linked now and have a selection of investment funds. Typically ranging from 30-1000.

Skandia's bond used to be one of the best but has been left behind. It is now expensive by modern standards and you can get a larger fund range in other places. Their product is about to be withdrawn for new business as the Selestia and Skandia platforms merge and the Selestia version of the bond is better than Skandia's.

It seems places like NU and Liverpool Victoria are tied up with with profits/distribution funds.

NU's investment bond is one of the best. It has low charges and over 100 funds. I dont know where you are getting the with profits/distribution fund only information from as that is not correct.

I have seen mention of being able to to take a 5% income out of an investment bond without tax implications. Is this just for basic rate tax payers?

It only applies to higher rate taxpayers or those close to higher rate. Basic rate taxpayers have no limit.

It seems that the investment bond is a bit like the tax deferral of a pension (without the 25% tax free sum), apart from the death benefits. I presume that this would give a flexibility greater than income drawdown in a pension, especially for a widow paying basic rate tax. (assuming the higher rate taxpayer died).

There is an element of deferral but not like a pension.

A higher rate taxpayer can use an investment bond but not pay any higher rate tax on the returns. If they become a basic rate taxpayer in the future, they can then encash the bond and pay not a penny in higher rate tax and no capital gains tax. If they are still a higher rate tax payer at that point, then higher rate tax will be payable on the gains (using a particular calculation) but they still avoid CGT.

moneyandmountains

Thanks a lot for this.
Norfolk must be spoilt for good IFAs :T