Norwich Union Portfolio Step-down: any good for income for a 63-yr-old?

dunstonh

The core problem with investment bonds is their shockingly high charges as detailed on this site provided by the official regulator:

The charges on these can be much lower than unit trusts.

The FSA tables assume maximum commission and even there, a good number of these still come in better than unit trusts.

If you invest 25k in an investment bond over 10 years, the effect of the charges on your returns will range from a minimum of 3,740 to a maximum of a totally disgraceful 10,100 pounds.

Investment bonds are best priced for investments over £100k. Under 100k they get less attractive with really around 50k being the minimum you would consider them for unless there are tax reasons for doing so.

So, your example of £25k is not a fair as you pick a value where it isnt going to be that good.

I leave it to other posters to decide why industry people are so keen on defending these pernicious products.It seems to be quite easy to figure out what their reason might be.

The reason is quite easy to figure out. You are telling downright lies in the hope that if you say it enough people will believe you.

I did an investment bond for £110k the other day and the RIY over 10 years 0.8%p.a. The effect of charges (thats not the charges but the higher figure where if the charges hadnt been taken and grew by 6% what would the figure be) over 10 years was £14,200. So, how does your £25k example have £10,100 charges and my £110k example have £14,200 effect of charges?

So, this bond was 0.8% p.a. in charges. How do unit trusts compare to that? Send them to your beloved HL and the same funds there in unit trusts would have had a RIY of around 1.3-1.4%

And finally, there are bond providers out there that allow you to invest in unit trusts directly with no charge on the bond wrapper so the charges are identical to buying the unit trusts unwrapped. So, if you want a clean tax wrapper, you can do so.

jamesd

munk, yes, you can give the money away and trust that the person you give it to will give it back if you need it if you do it completely legally 7 years or more before you die.

EdInvestor, worth noting that I'm not in the business and also disagree with your misdescription of them. Your comments prompted me to take a closer look, then start disagreeing with you.

EdInvestor

jem16 wrote: »

You have already been told...

You can tell she's a schoolteacher, can't you?

Once again you miss out ( or conveniently ignore ) the fact that IFAs here make it very clear that an IB is suitable usually only for higher amounts such as £100k plus.

I doubt that this is immediately apparent to most readers. In general the IFAs say "terms are better".They don't explain the long list of reasons why IBs are not suitable for basic rate taxpayers with amounts less than 100k - which, after all, does include most people posting on this board about these products.

I would be less critical if they did make this clear.

munk

jamesd wrote: »

munk, yes, you can give the money away and trust that the person you give it to will give it back if you need it if you do it completely legally 7 years or more before you die.

What I was getting at was how are HMRC to know if a person has given away money 'illegally' - IMO it seems absurd though to say that someone giving away their hard earned money to someone else without filling out a form to HMRC is performing an 'illegal' action (not having a dig at you, just saying the idea seems absurd ).

Say someone gives away £20,000 to a close family member less than 7yrs before passing away (for a mortgage deposit for example, or w/e) but they don't declare it as a gift to HMRC. How are the HMRC to know about this 'illegal' gift - do they actually look over a person's accounts/bank statements when someone dies looking for these kind of irregularities?

I can imagine many people do exactly this every day without realizing they are committing a crime.

Off to read up on IHT and gifts

EdInvestor

dunstonh wrote: »

The charges on these can be much lower than unit trusts.

This is correct but you can go to a discount broker for unit trusts (you'd be crazy not to) as otherwise you pay a 5% initial charge.

So, your example of £25k is not a fair as you pick a value where it isnt going to be that good.

It's the highest amount on the FSA website.

The effect of charges (thats not the charges but the higher figure where if the charges hadnt been taken and grew by 6% what would the figure be) over 10 years was £14,200. [/qupote]

It amounts to the same thing.You still lose 14,200 which would otherwise be in your pocket.

Is it worth paying this amount to an advisor to pick a few funds, or could you do this yourself with a bit of effort?How much is your time worth?Note that this is supposed to be a low price from an advisor who claims he has competitive charges.

Imagine how much the expensive IFA will sting you for. :mad:

So, how does your £25k example have £10,100 charges and my £110k example have £14,200 effect of charges?

That's what the FSA website says.I doubt the provider of the ripoff bond would dare to lie to the regulator.It neatly confirms what you say, doesn't it?

Investment bonds are unsuitable for amounts under 100k.

Some of us might think that losing 14k on an amount over 100k was pretty unsuitable too.

dunstonh

which, after all, does include most people posting on this board about these products.

You cannot really compare legacy bonds with modern bonds. It would be like doing a review of an Austin Allegro and then saying modern cars suffer the same faults.

We also need to remember that fund supermarkets with the range of retail funds are a more modern occurance and can make legacy products taken out before they were available look bad.

This is correct but you can go to a discount broker for unit trusts (you'd be crazy not to) as otherwise you pay a 5% initial charge.

You can go to a discount broker for bonds as well. Indeed, I was comparing the investment bond RIY of 0.8% to HLs 1.3-1.4% on unit trusts.

It amounts to the same thing.You still lose 14,200 which would otherwise be in your pocket.

No it wouldnt. The amount would be higher as the unit trusts are more expensive.

Is it worth paying this amount to an advisor to pick a few funds, or could you do this yourself with a bit of effort?How much is your time worth?Note that this is supposed to be a low price from an advisor who claims he has competitive charges.

Since when do discount brokers have no charges? Since when do unit trusts have no charges?

That's what the FSA website says.I doubt the provider of the ripoff bond would dare to lie to the regulator.It neatly confirms what you say, doesn't it?

Investment bonds are unsuitable for amounts under 100k.

Some of us might think that losing 14k on an amount over 100k was pretty unsuitable too.

Investment bonds can be suitable for amounts under 100k. However, they are best priced for amounts over 100k.

Losing 14k over 10 years on the amount of 100k is very good. You dont think that companies invest the money for free do you? Actually it appears you do think that given your previous response.

To be able to invest money in a bond that has a lower reduction in yield than a stakeholder pension, let alone a unit trust, does not make it more expensive than a unit trust. I don't know how you can turn round and say the bond is more expensive than unit trusts when it is cheaper.

EdInvestor

dunstonh wrote: »

I don't know how you can turn round and say the bond is more expensive than unit trusts when it is cheaper.

It may be a bit lower on charges in some cases but it woupld nneed to be because of the effect of tax.

The bond loses 20% tax on capital gains automatically, it's non reclaimable.

The unit trust loses nothing until you actually sell and realise a capital gain - and then you have a tax free allowance of 9,200 a year (each).So it's unlilkely you will have anything to pay.

The reason people buy IBs is tax. A higher rate taxpayer would pay 25% tax on dividend income (nil in the bond) 40% on capital gains (20% in the bond) and the bond will act as a way to withdraw capital from the estate IHT free.

“Tax planning tends to be a more important consideration. The ability to mitigate income tax, capital gains tax and inheritance tax is a more powerful driver than investment markets and demand for investment bonds tends not to fluctuate with interest rates.”

http://www.trustnet.com/general/news/research.asp?id=144

That's fine for the HRT.

But the effect on the BRT(or lower) is reversed.The BRT effectively pays no tax on divis whether in bond or not, so no advantage with the bond. He can use his ISA for property or bond investments and pay no tax on them either, so no advantage with the bond. He is unlikely to pay any capital gains tax outside the bond (annual allowancy 9.2k on realised gains) but will pay 20% within the bond so the bond is a disadvantage. He is not bothered by IHT as he isn't yet worth 300k, so no advantage to the bond.

So the bond makes the Basic rate or lower rate taxpayer worse off, because he is charges taxes he would otherwise not pay - and often higher charges as well.

dunstonh

The bond loses 20% tax on capital gains automatically, it's non reclaimable.

Only on assets which are chargeable to gains and the fund manager does have access to the various reliefs that exist. In reality, a balanced portfolio would have the taxation closer to 10% as an average.

The unit trust loses nothing until you actually sell and realise a capital gain - and then you have a tax free allowance of 9,200 a year (each).So it's unlilkely you will have anything to pay.

Unit trust holding of £200,000 for a single person gains 15% in the year. That is a £30,000 gain. To utilise the CGT allowance, the person has to sell the units and rebuy. That takes them out of market and can lead to costs (bid/offer spread again for example). They can use up their £9200 but they are £20,800 short of allowance. £20,800 for a higher rate taxpayer is 40%. Even for a basic rate taxpayer, they could be seeing some higher rate on some of that amount.

The bond would have paid UPTO 20%, wouldnt require you to be out of market and you can switch funds as often as you like without triggering a CGT liability that could happen on unit trusts.

There are pros and cons with all the UK tax wrappers. If you post only the negatives on all the wrappers and none of the positives then you would never use any of them, including ISA. You need to look at the pros and cons and decide which is best that fits in with your circumstances.

Sometimes cheapest is not best. Many people prefer the convenience of investment bonds over unit trust as they dont want to filling in a tax return every year declaring the CGT allowance used and then having to budget for a CGT bill in the future. The bond may not be as tax efficient for them as the unit trust would be but the "what you see is what you get" convenience of the bond is worth it.

Some of these modern bonds are brilliant. There are still some naff versions though but the same can be said for any retail product (financial or otherwise). Measure the product like for like and not worst bond vs best unit trust. Measure best vs best.

jem16

EdInvestor wrote: »

You can tell she's a schoolteacher, can't you?

Apologies for teacher mode - difficult to switch off sometimes.

However if I was to write your school report I'm afraid it would read;

"Must read more carefully if she is to make good progress"

They don't explain the long list of reasons why IBs are not suitable for basic rate taxpayers with amounts less than 100k - which, after all, does include most people posting on this board about these products.

I would be less critical if they did make this clear.

That's my point Ed.

I have seen many occasions on this board where it has been explained how a basic rate taxpayer with less than £100k can benefit. For example;

Using a trust
Age allowance reduction
BRT but close to HRT
Pension credits
Avoiding care home fees
Convenience re tax return


However each time an IB is mentioned and without knowing all the pertinent information, you say - "Avoid as it has high charges".

EdInvestor

dunstonh wrote: »

Unit trust holding of £200,000 for a single person gains 15% in the year. That is a £30,000 gain. To utilise the CGT allowance, the person has to sell the units and rebuy. That takes them out of market and can lead to costs (bid/offer spread again for example). They can use up their £9200 but they are £20,800 short of allowance. £20,800 for a higher rate taxpayer is 40%. Even for a basic rate taxpayer, they could be seeing some higher rate on some of that amount.

But the capital gain is not taxed at all if you don't sell the fund/shares.

I realise that fund managers are constantly buying and selling (aka churning) their clients portfolios - this is how they make much of their money after all with those hidden transaction costs - and certainly if an individual did that then they would soon use up their CGT allowance.

But canny investors usually adopt a Long Term Buy and Hold (LTBH) strategy.They don't buy and sell all the time incurring transaction costs.They don't realise their gains unless they particularly want to use the allowance, perhaps to pay themselves an income top-up, in which case they make one sale a year, that's all.No tax to pay and no hassle (and no hidden extra fees from churning!).

...they dont want to filling in a tax return every year declaring the CGT allowance used

This isn't a requirement for most people.

the "what you see is what you get" convenience of the bond is worth it.

Incredible that you could say that about one of the most complex products on the market.