Prudential Bond.

BostonR

Our financial advisor is recommending a Pru Bond for a £400K investment at 5% which will realise £20K pa - which we are happy with. My wife and I enjoy a reasonable joint pension income of £6K per month. Mortgage is paid off (house value is £1.6M) and we have no other debts.
Is there an alternative I should discuss?    

Albermarle

BostonR said:

Our financial advisor is recommending a Pru Bond for a £400K investment at 5% which will realise £20K pa - which we are happy with. My wife and I enjoy a reasonable joint pension income of £6K per month. Mortgage is paid off (house value is £1.6M) and we have no other debts.
Is there an alternative I should discuss?    

Your financial advisor has all the details about you, your financial circumstances and your objectives.
We do not so can not really answer sensibly without more info.

By the way £70+K pa retirement income is a bit more than 'reasonable' !

Marcon

BostonR said:

Our financial advisor is recommending a Pru Bond for a £400K investment at 5% which will realise £20K pa - which we are happy with. My wife and I enjoy a reasonable joint pension income of £6K per month. Mortgage is paid off (house value is £1.6M) and we have no other debts.
Is there an alternative I should discuss?    

Offshore bond so it's tax free?

dunstonh

Our financial advisor is recommending a Pru Bond for a £400K investment at 5% which will realise £20K pa - which we are happy with.

It is unusual to see an off-platform investment bond recommended nowadays.     Typically you only see offshore bonds, not onshore and usually in relation to a trust.    However, with the taxation changes in respect of dividend tax and CGT, there is an increasing number of scenarios where it is best to use part offshore bond, part pension, part GIA and part ISA, with annual allowances used over the years.

However, clarification on something.  The 5% is not a rate of return.  It is an annual allowance, before adviser charges that you can draw without triggering an immediate tax liability.     Also, it doesn't make it tax free.  It just defers it until later.      If the adviser is taking an ongoing charge, then its 5% minus the ongoing adviser charge, that is available.   i.e. the adviser charge is classed as a partial withdrawal.  If you take 5% plus there is an ongoing adviser charge, then it would create a chargeable gain.

Is there an alternative I should discuss?    

Is this an IFA or an FA?
Is the bond onshore or offshore?
Is it going into trust?
What other investment wrappers are being recommended with it (as its usually a package scenario)
What objective is meant to achieve?  (without objectives, its difficult to know what alternatives are suitable or even if this one is suitable)

phynix_uk

Old school advice. 

I agree with 'dunstonh', unusual to see this anymore but they were commonplace 15/20 years ago. 

Do you actually need income? If the answer to that is no, why would you draw funds from an investment that's designed to grow over the longer-term? 

I would imagine when combining the adviser and Pru's fees you'll be knocking on the door of 1.5%pa meaning the 5% withdrawal rule would limit you to just 3.5%. As previously stated, you can withdraw what you like but there will be a chargeable event if you draw above the 5%. This is not classed as taxable income as it's literally 'capital reduction', you're just taking some of your original investment back. This means that if you do this, you'll exhaust the 5% rule after 20 years. Ultimately, the 5% rule is NOT a reason to invest into an investment bond. Nor is life cover if the adviser mentions that.

What will the adviser be doing for you going forward? If they're not actively managing/making changes to the underlying investment strategy of the bond then make sure there's no ongoing adviser fee. With a pot size of £400k, I'd also expect to see a portfolio of investments not a single fund.

If the bond is onshore, the Pru will pay 20% tax on the annual growth 'on your behalf' which you can't claim back, and then you'll have potential to pay more tax if you withdraw funds in the future. Offshore, will not pay the tax annually but roll this up and then you'll potentially have a big bill when you sell and bring the funds back to the UK. 

Linton

If @dunstonh is correct and the 5% of the initial investment is a tax free withdrawal then this is simply regarded as giving you your initial pot back. After 20 years you will need to pay tax on the rest. However since 20% basic rate is deemed to have been paid this could be useful tax planning.

One aspect to bear in mind is that this 5% will not be inflation linked so your other investments will need to plug the gap.

The key point though is that the £20K/year is less than 1/3 of your total income.  So you should see the investment bond as part of the overall strategy. It does not make sense to question it in isolation.

dunstonh

If @dunstonh is correct and the 5% of the initial investment is a tax free withdrawal then this is simply regarded as giving you your initial pot back. 

Its not tax free.  it is tax deferred.   Stay within the 5% and you defer the tax position of that withdrawal until later (e.g.  if higher rate taxpayer now but will be a basic rate taxpayer later then you can take upto 5% in those higher rate tax years without triggering a chargeable event.    Then when you are basic rate, you can create a chargeable event to a level that keeps you in the basic rate band).   Withdrawals made within the 5% get added back on when a chargeable event occurs.  

So, you are pushing the tax liability from now until later.  If you are always going to be a higher rate taxpayer then there is very little to gain and potentially, you could be pushing it into a situation where additional tax rate could apply if you are not very careful.

An example I have is someone with a very large offshore bond who is a non-earner with no income.    We use offshore bond in that scenario as it avoids CGT and dividend tax.   Each year we draw from the offshore bond creating partial surrenders (so triggers a chargeable event on a number of the policy segments) and feed ISAs and pension.  There is also a smaller amount in the GIA to utilise annual dividend and CGT allowances.    So, when a trust is not being used, you would expect a range of tax wrapper to be utilised.   

If there is a trust involved, then it becomes significantly more complicated.  I have seen too many investment bonds set up in trust which are justifiable but pointless (i.e. the reasons they use for the trust justification are correct and would avoid missale allegations but in the real world they were unnecessary).  Usually from a certain tied FA who seems to do it to keep IFAs away as it can be very difficult, or indeed impossible, to unwind it after the event without incurring an unjustifiable cost.

wjr4

It seems an awful lot to put into an Investment Bond. Have they considered ISAs & pensions?

BostonR

Thank you for your valuable contributions. I checked in with my financial advisor and the bond is the Pru Investment Plan. It does suit our short/long-term plans.

dunstonh

BostonR said:

Thank you for your valuable contributions. I checked in with my financial advisor and the bond is the Pru Investment Plan. It does suit our short/long-term plans.

I don't want to second guess things here but I would be on guard.    The product type (onshore bond) probably accounts for less than 1% of investment recommendations.    So, are you really in that 1% or is there something else going on?   - is it being advised by an IFA or is it a sales rep/FA?

Onshore bonds are virtually obsolete nowadays.  Offshore bonds can still have a place in the right niche.      The offshore bond would be recognised by the adding of international after the provider name.  i.e. Prudential international investment bond.   However, the Pru investment plan is the onshore bond.  

I am really struggling to see a scenario where you would use an onshore bond with todays taxation rules.   The internal taxation of an onshore investment bond is greater than unwrapped investments (often referred to as a general investment account  - GIA).   You typically use a GIA after you have used the ISA allowance (and pension wrapper allowances).  

If you give us some more info and answer the questions raised on this thread then we may be able to see why such a rare and highly unusual product type is being recommended to you.

BostonR

Thank you to everyone who has responded - very much appreciated. Some additional information:
My wife and I are both retired - aged 62.
Our joint net pension income from various sources is circa £70K pa.
We have £650K in cash - hence the opportunity to invest.£250K of that amount is from my tax free lump sum just taken. I am just within my lifetime allowance.
I have £250K in vested untaken share income over the next 2-4yrs.
We have no debts.
House is fully paid for with a value of £1.6M.
We would like to invest £400K in a conservative vehicle, hence the Pru Investment Plan. We wanted to be able to access cash reasonably quickly, if we decide to purchase a villa abroad.
Of the £250K in cash remaining we want to gift £100K to our sons to enable them to get a mortgage. We want to invest £50K in ISA's and retain £100K in cash.