Investment bonds?

chucknorris

EDIT: Problem solved, I was unaware about 'adjusted net income'

I am getting very close to the 60% tax band, and in a couple of years I will go over it for sure (by about £15k), when I start to receive part of the teachers pension fund, and well over it (by about £29k) a year later when I receive the remaining TPS and state pension. It made me think that I would have to reluctantly retire (I like my job as a university lecturer). So I was googling for investments (or even savings) products that deferred tax liability. If I found a suitable product, it would mean that I could carry on working, at least for a few years. My google search flagged up 'investment bonds', does anyone know anything about them? All I know at the moment is that:

1. You can withdraw up to 5% a year with no tax liability (I wouldn't actually need to do that, so is it advantageous to do so).
2. If you do not exceed that 5% (in 1 above) there is no tax liability until maturity (or other things, that I am unlikely to want to do)

That all sounds good, but what I don't know is:

1. What they actually are
2. What are the typical fees/charges like 
3. Is there any disadvantage in investing in them
4. What are the typical returns (probably not a sensible question because it will likely depend on which type you invest in, and they may be many?)
5. Apart from deferring tax over time, is there any other tax advantage, for example taking 5% out every year tax free, does this mean as a 40% tax payer, I will avoid the additional 20% tax, over and above the 20% tax that is taken within the investment
6. What sort of asset class can you invest in (I mean can they be fixed interest, equities or corporate bonds etc)

Have I missed crucial aspect about investment bonds that I should be aware of?

dunstonh

1. You can withdraw up to 5% a year with no tax liability (I wouldn't actually need to do that, so is it advantageous to do so).

That is not quite correct.  THere is no immediate tax liability. The potential tax position is deferred until a chargeable gain is created.

2. What are the typical fees/charges like 

Nowadays, much the same as the other tax wrappers.   Offshore bonds typically cost more than onshore ones.

3. Is there any disadvantage in investing in them

They need to be controlled when it comes to withdrawals.  Often that can be long term phased planning.  Get it wrong and it can be a very expensive tax bill.

4. What are the typical returns (probably not a sensible question because it will likely depend on which type you invest in, and they may be many?)

Modern investment bonds are whole of market and can hold UT/OEICs, ETFs, ITs, shares etc just as the other tax wrappers.

5. Apart from deferring tax over time, is there any other tax advantage, for example taking 5% out every year tax free, does this mean as a 40% tax payer, I will avoid the additional 20% tax, over and above the 20% tax that is taken within the investment

Offshore bonds benefit from gross roll up. The ability to defer to gains to a later tax year when you may be a basic rate taxpayer or assign some to a spouse who may be basic or lower taxpayers can be beneficial.

6. What sort of asset class can you invest in (I mean can they be fixed interest, equities or corporate bonds etc)

Whole of market as mentioned above.

Have I missed crucial aspect about investment bonds that I should be aware of?

Typically only available via IFAs.  Some FAs still offer them but you wouldn't want to use an FA.
If there is no hope of you deferring gains until a later tax year as you would always be higher/additional rate then it can br largely pointless.  Although the ability to place investment bonds into trust could be beneficial in some cases.

chucknorris

Thanks dunstonh, I value your opinion very highly, in fact, I almost messaged you about this, but I did not want to disturb you, and appear demanding or needy. I have no idea how I have not been aware of investment bonds before (perhaps they are a bit niche market), but they seem to address my issues, so I will shortly spend a lot of time looking into them more.

Notnewnotold

If you are still working and earning enough to do this, could another option be to open a cheap and cheerful SIPP and make some additional pension contributions that bring you back under the 100k threshold? Assuming you are only in receipt of DB pensions during this period, you wouldn't have MPAA constraints to worry about...

chucknorris

Unfortunately whilst a SIPP contribution provides tax free income (in the short term), it is only zero rated income (but it still is counted as income), which means it that still is counted as overall  income, and therefore it takes you closer to the £100k limit where the 60% tax band starts.
I could do salary sacrifice for my additional TPS pension (which I might end up doing) but for the amount of pension that I could buy in the next tax year it costs £516 more than paying by lump sum. But as you can probably guess, paying by lump sum increases my overall income, and takes me over the £100k threshold.
It is only £516 per annum (so not critical), but I am trying to avoid paying it.

Malthusian

chucknorris said:

Unfortunately whilst a SIPP contribution provides tax free income (in the short term), it is only zero rated income (but it still is counted as income), which means it that still is counted as overall  income, and therefore it takes you closer to the £100k limit where the 60% tax band starts.

I think you have misread something. Making a personal pension contribution reduces your "adjusted net income" and if that reduction takes place within the 60% tax band, you get 60% tax relief. Or you can use net pay / salary sacrifice, to ensure your taxable income is never above £100,000 in the first place (or not as much above).

An offshore bond by contrast is no help with being taxed at 60% on your earned income whatsoever. You don't get tax relief on offshore bond premiums. It would only help defer tax on interest and dividends on funds held in your own name. But if I've read your post correctly, you want to defer tax on your earned income. That is the raison d'etre of pensions.

dunstonh

I have no idea how I have not been aware of investment bonds before (perhaps they are a bit niche market), but they seem to address my issues, 

Investment bonds used to be a well-used tax wrapper.   However, changes to capital gains tax rates and the way dividends were taxed pushed investment bonds down the pecking order.  So, it is niche nowadays.     Very niche.

That said, if the Government hit CGT in the next budget, investment bonds could come back in to play again (there is no CGT charged on gains in an investment bond).

Notnewnotold

chucknorris said:

Malthusian said:

chucknorris said:

Unfortunately whilst a SIPP contribution provides tax free income (in the short term), it is only zero rated income (but it still is counted as income), which means it that still is counted as overall  income, and therefore it takes you closer to the £100k limit where the 60% tax band starts.

I think you have misread something. Making a personal pension contribution reduces your "adjusted net income" and if that reduction takes place within the 60% tax band, you get 60% tax relief. Or you can use net pay / salary sacrifice, to ensure your taxable income is never above £100,000 in the first place (or not as much above).

An offshore bond by contrast is no help with being taxed at 60% on your earned income whatsoever. You don't get tax relief on offshore bond premiums. It would only help defer tax on interest and dividends on funds held in your own name. But if I've read your post correctly, you want to defer tax on your earned income. That is the raison d'etre of pensions.

Yes, it reduces your 'net' income. but it does not reduce your gross income, so your gross income increases, that is exactly the issue.
But something like an investment bond, which defers income, will remove income from early years and defer that income to later years, which is what I need (I think, we need someone as wise as dunstinh to confirm this).

Ok I'm confused now! You pay extra into the SIPP (but don't draw it out), annually, until such point as you do retire and will then be (presumably) well under the 100k mark so can then start withdrawing it - at a preferential rate because of the 25% TFLS option.

Surely that has the same effect of shifting income from early to later years as well? Or are you planning to work till you are 100?

Notnewnotold

No you are explaining the issue exactly as I expected. And this year, my wife will be making an additional payment into her SIPP to ensure that her adjusted income is kept just below 100k. Same as she did last year. So that when she does her tax return, her personal allowance is effectively reinstated. Her tax calculation shows the personal allowance being added to as a result of pension contributions, and is by far the most straightforward solution to this problem...

chucknorris

Although you have not explained this very well (but thanks anyway), fortunately Malthusian has explained it above, and it is to do with 'net adjusted income' and he provided  a link (and that is when I realised that 'net adjusted income' is what is applied), because the link explains that it is not the gross income that is relevant, it is 'adjusted net income' which dictates when the 60% tax band starts. I was going by my tax calculation from HRMC, and mistakenly thinking about the gross income, and not being aware that it was the 'adjusted net income' level of £100k that is relevant. 

So this is actually very good news, I do not have to retire earlier than I would have wanted to! 

But I am still wondering are investment bonds a tax advantageous investment? Maybe despite being wrong about my tax position, have I stumbled upon something?

chucknorris

Malthusian said:

chucknorris said:

Unfortunately whilst a SIPP contribution provides tax free income (in the short term), it is only zero rated income (but it still is counted as income), which means it that still is counted as overall  income, and therefore it takes you closer to the £100k limit where the 60% tax band starts.

I think you have misread something. Making a personal pension contribution reduces your "adjusted net income" and if that reduction takes place within the 60% tax band, you get 60% tax relief. Or you can use net pay / salary sacrifice, to ensure your taxable income is never above £100,000 in the first place (or not as much above).

An offshore bond by contrast is no help with being taxed at 60% on your earned income whatsoever. You don't get tax relief on offshore bond premiums. It would only help defer tax on interest and dividends on funds held in your own name. But if I've read your post correctly, you want to defer tax on your earned income. That is the raison d'etre of pensions.

Thanks, now it all makes sense, the 'net adjusted income' was not known to me, happy days.