Sanity checking that an "investment bond" is sensible?

investmentisscary

Hello, I am new to posting on the forum (although have lurked for a little while in reading before building up the courage!). I am faced with a decision about how to invest what to me is a terrifying sum of money - initially around £200k, but in 6 months could rise to around £400k. It represents the proceeds from selling shares that I have received from my employer over past decades that I have until now been ignoring, but now seems prudent to diversify to something lower risk than staying exposed to a single company.  My financial advisor has recommended -- especially in light of the risk of future CGT changes -- that I sell ~2/3rds of my employer shares and put the proceeds into an "investment bond". As you can tell from my username, while I've long invested in S&S ISAs I am scared of making a mistake as this will likely represent a significant chunk of my retirement savings, especially if I get made redundant in the next year (not seemingly on the cards but always a possibility).

My situation in brief: I'm 51 working full time with no debts except for an offset mortgage which is fully offset (so effectively it's like I own my own house as I pay no interest, but have funds on tap for emergencies). My combined pensions are already close to the lifetime allowance so I'm only putting in the minimum from now on to get matching from my employer. I  religiously max out my ISA allowance every year already from salary. I plan to max out my premium bonds to 50k (as a form of "safe" cash-like savings) but after that I'm flummoxed what else to invest in. My financial advisor recommended a small portion go to a VCT, but the bulk be put into an investment bond on the basis of its  tax efficiency (you can apparently withdraw up to 5% of your original investment a year for 20 years, with all tax deferred?), as well as it being cost effective and flexible to switch investments in it longer term from a growth focus to an income focus as I near retirement.  

I have a few questions and would be grateful for any insight this forum can share     
1/ In my situation, does an investment bond sound conceptually a sensible vehicle to pursue, or are there other vehicles I should be considering instead or in parallel? My plan is to still keep my existing ISAs and pensions and other things separate - I'm just looking for a place to park the proceeds from the sale of my employer shares where they can be invested sensibly and tax efficiently for retirement. 

2/ If it makes sense, are there any comparison sites for comparing different investment bonds? I had a hunt to no avail. I don't even know if you can buy investment bonds DIY like you can buy S&S ISAs or if it's only through financial advisors, or if they are so "custom" that it's like comparing apples and oranges? 

As additional final context, as it seems relevant, the particular investment bond that my financial advisor is recommending is from SJP.  I have seen there are bad online reviews of SJP, and that many on this forum strongly recommend going to an IFA instead. It is because of such reviews that even though I trust my advisor, I'm seeking to sanity-check there's nothing obviously wrong with his recommended strategy.  I have previously been down the IFA route 15-20 years ago - I even paid a regular monthly fee to try to ensure the IFA was genuinely independent - yet still got totally messed about (I finally quit after they ludicrously tried to get me to invest in Spanish property just before the crash).  After that bad experience I tried DIY investing with SIPP pension etc but found it super stressful given I don't have much time (or interest) in financial news. I had evolved to a "head in sand" strategy of doing nothing except company pension/ISA until a friend introduced me to their SJP advisor 5 years ago. I was initially very wary, but over the past 5 years they have proven brilliant at handholding me through some difficult decisions and their fees have not seemed unreasonable (and less than those referenced). It could be that my SJP advisor has given me a really good deal over the past years to build a relationship for this moment to cash in(!!) - but I don't begrudge paying for service, and worry that I will struggle to find another advisor I can trust after my last terrible IFA experience. Still given the potential scale, I am seeking a basic sanity check that this 'investment bond' concept is not a totally stupid idea   The conditions of the SJP bond are that it's free to invest in initially but they take a % annual fee, and if you exit early you need to pay another % fee (on a declining scale getting to zero after 6 years, resetting to the start if you ever add more funds). As I have other savings, and don't plan to add to it or draw on it until retirement, I am not too worried about the exit fee.  

Sorry for the long-winded post, and thank you to those who read this far.  I will be very grateful for any suggestions of alternative investment vehicles to consider, or any other questions I should be asking my advisor  

justme111

Have you checked exactly what is the fee that you are going to be paying for getting that investment bond?
Have you checked that you could hold it if you do not continue with them or is it a specific product that you can hold only while being managed by them ?
Answers to these 2 questions would help me to make up my mind one way u another. I suspect the fees are going to be 6% loss if you withdraw in the first year tailing
Plus about 2% per year.
And you would not be able to hold that bond without them.
If it is the case indeed I would not - I do not like being a hostage. 
They have to have good bedside manners , after all that is what they charge money for ! I try not to chose any services on that basis ...

dunstonh

My financial advisor has recommended -- especially in light of the risk of future CGT changes -- that I sell ~2/3rds of my employer shares and put the proceeds into an "investment bond".

Investment bonds are a niche option noawadays.  I haven't done one in over 5 years.     There is one salesforce FA that is selling bucketloads of them and that is a saintly firm but that is mainly to stop IFAs taking the business over once the person realises how much better an IFA would be.

Selling a large value of shares within a single company is probably a good idea as its is very high risk.  So, that bit doesnt sound wrong.   I am just struggling to see why an investment bond would be suitable.   You can make them suitable on paper by adding in a worthless trust but I would be on guard.

My financial advisor recommended a small portion go to a VCT, but the bulk be put into an investment bond on the basis of its  tax efficiency (you can apparently withdraw up to 5% of your original investment a year for 20 years, with all tax deferred?), as well as it being cost effective and flexible to switch investments in it longer term from a growth focus to an income focus as I near retirement.  

Tax deffred being the key thing.  Not tax free.  And internal taxation on onshore bonds will be somewhere around 13% to 18% depending on the underlying assets.   So, whilst not subject to CGT, gains are subject to taxation that is currently greater than CGT for most people.

My plan is to still keep my existing ISAs and pensions and other things separate 

You probably need to stop thinking of your investment wrappers separately and start looking at them collectively.   Are you maxining the pension wrapper out for example?

are there any comparison sites for comparing different investment bonds?

No.  Modern investment bonds can be whole of market and have identical investments to pensions, ISAs and unwrapped.   

edit:  noting your reference to SJP, that would be an old fashioned investment bond and not whole of market.  The sort that are best avoided (that goes for really most options nowadays that are not whole of market whether they are ISAs, pensions, unwrapped, onshore or offshore bonds.

. I don't even know if you can buy investment bonds DIY like you can buy S&S ISAs

You cant.

As additional final context, as it seems relevant, the particular investment bond that my financial advisor is recommending is from SJP.

I read that bit after I typed my bit higher up.   So, "what a surprise".

 have previously been down the IFA route 15-20 years ago - I even paid a regular monthly fee to try to ensure the IFA was genuinely independent - yet still got totally messed about (I finally quit after they ludicrously tried to get me to invest in Spanish property just before the crash).

99% of IFAs have never recommended anything other than mainstream.  A lot of the rubbish stuff, like unregulated investments, were from firms that no longer exist.    A lot of them were not actually IFAs but pretending to be. They used the unregulated stuff as they couldnt put in place regulated things.

The choice should be between DIY and using an IFA.  Not using a sales rep of a tied company.

Old_Lifer

And see what changes next week's Budget brings.

TheAble

You've got plenty of capital in the form of pensions, maxed out ISAs, premium bonds and the like so I think you can feel confident rather than nervous. 
I know zilch about investment bonds but I'd agree with others that I'd be wary. I know quite a bit about VCTs and given the amounts of money you have in other stuff I'd say they could play a part in your portfolio. Some are better than others though so do your research. 
An obvious thing to put the capital into is your mortgage. Yes the interest rates are low but it's a guaranteed return, tax-free and will remove that bit of uncertainty and risk from your life. I would pay it off personally.
And as for the rest? Some good old low cost Vanguard index trackers! Yes there's CGT potential but you can still at the time of writing get 12k-ish per year as a tax-free gain.

investmentisscary

Thank you both.  
@justme111 - your guesses were spot on. Yes, it's 2% a year; and can only be held through them (which actually felt spun as a positive, as if it were exclusive - I get that this is a sales tactic). If I were to seek to move it in the first year it would be 6%, in the 2nd year 5% etc until after 6 years no more - so I would be have to keep it with them for 6 years untouched to avoid exit fees. Given my track record in ignoring things for decades this didn't seem too onerous (except for the trick to reset back to zero if you invested more, which is cheeky), but if I noticed it took a dive early on agree it would be frustrating to be locked in.

@dunstonh - thank you for your bluntness. I didn't realise an investment bond was such an unusual thing. I thought it was just one of those specialty things I had never heard of because I don't pay attention!  I also thought that you just paid tax on it at your tax rate at the end of the 20 years (which given I would be retired by then would be much lower than the top rate I'm on currently) - but if that's wrong and tax is being incurred throughout at a similar rate to CGT then there's little tax saving ultimately, unless Rishi changes the equation. Sadly re: pension wrapper, I only have enough allowance left to pay in an extra 20k this year (all past year allowances used up due to tapering), so even if I wasn't near the lifetime allowance I am pretty constrained. 

Overall both your comments make me think I should definitely look around some more, and even if I still end up investing some into it in order to keep access to wider advice, to cut it right back to the minimum. I've also asked a few friends who seem to be doing OK financially if they know of an IFA to recommend. 

investmentisscary

Ha, in the time I took to type that more of you replied. Thank you to you too.

@Old_Lifer that's a good call. In fact it's the fear of what Rishi might do in that - the rumours of CGT being racheted up - that terrified me into looking at finally dealing with the employer shares in the first place as they are very CGT-exposed. In a way no matter what he does that will have been a good nudge to diversify so I am trying to tell myself to be grateful whatever he does(!)

@TheAble thank you for the tip to look at Vanguard. I seem to have many other flavours of index trackers in my various S&S ISAs but I don't think I have one from them yet.  

dunstonh

@dunstonh - thank you for your bluntness. I didn't realise an investment bond was such an unusual thing. I thought it was just one of those specialty things I had never heard of because I don't pay attention!  I also thought that you just paid tax on it at your tax rate at the end of the 20 years (which given I would be retired by then would be much lower than the top rate I'm on currently) - but if that's wrong and tax is being incurred throughout at a similar rate to CGT then there's little tax saving ultimately, unless Rishi changes the equation. Sadly re: pension wrapper, I only have enough allowance left to pay in an extra 20k this year (all past year allowances used up due to tapering), so even if I wasn't near the lifetime allowance I am pretty constrained. 

Investment bonds used to be popular historically as they internal taxation was lower than holding investments unwrapped.   However, when the dividend rules were changed and CGT reduced, they ceased to be viable apart from larger amounts.  And even then, you would still hold unwrapped up to around £150k to fall within the allowances (and then transfer each year going forward from the bond into the GIA and then from the GIA to the ISA/pension).  It was reported that the year that followed the changes, Bond sales fell 40% and then declined each year after.

Unlike most other tax wrappers, investment bonds can be placed in trust.   You tend to find them using trusts a lot as they are usually difficult to bust once set up.  The reasons for the trust are valid, in that they won't be classed as missales, but the actual benefits are usually minimum to meaningless and are just an excuse to justify using an investment bond over the alternatives.   Offshore bonds tend to be more favourable than onshore bonds as there is no internal taxation on those.   However, the taxation is still deferred like onshore bonds.

In theory, investment bonds could come back into play if CGT and income tax changes occur that makes the overall taxation higher than an investment bond.   However, you certainly wouldn't set up an investment bond now on the basis of media speculation.     

LHW99

Not an expert, but the combination of VCT and investment bond seems odd to me.

jimjames

investmentisscary said:

Sorry for the long-winded post, and thank you to those who read this far.  I will be very grateful for any suggestions of alternative investment vehicles to consider, or any other questions I should be asking my advisor  

I'd definitely be looking at finding an IFA to get an alternative view from your tied SJP adviser - they are not independent and only sell their own products. In terms of the charges you currently pay the numbers may sound small but compounded over many years what seems a small difference can have a huge impact.

Voyager2002

Some thoughts:

I served as executor for my father's estate, and much of his wealth was held in an investment bond with SJP that sounds similar to the investment you are considering. Evidently it offered some kind of tax advantage but I could never work out what, and in the event it went through probate and everything just as if it had been an ordinary investment.

The charges with SJP are high and are not transparent: I needed to ask some detailed questions to establish what they were since this information was not given on-line. Obviously these charges pay for a high level of service, and for someone who is "not short of a bob or two" (eg has almost maxxed out the pension LTA) and who does not want to spend time and effort getting to grips with ideas about investment could be seen as worthwhile. Conversely, be aware that a fairly limited amount of effort, meaning that you could avoid using SJP, would save you a lot of money. In my father's case, within a couple of years of making this investment with SJP he needed to move house and this involved taking some money out of the investment bond, and the exit charges were an extremely painful amount.

As for alternatives: general advice on this board is to make the investments that are right for you and only then consider tax aspects, rather than choosing investments for tax advantages. If you follow this precept then for someone who has invested the maximum possible in pension and ISA and has effectively paid off his mortgage, standard advice would be that you could afford to take some risks such as investing in the kind of company that offers the VCT tax concession. Alternatively, you might prefer to seek out the most tax-efficient investments possible, and for that you would need advice from a genuinely independent IFA or possibly an accountant.