Legal & General distribution bond

turbobob

Here is a link to some details of its performance and the assets that it invests in. http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=LGDDOA&univ=N

Fairwinds

Thanks for the link bob. Can you explain what the difference between a fund and a bond is?

Also their one says "income profile" - i found some references on here to a distribution fund with growth in the name - is that just about whether gains are reinvested or taken as income.

The graphs on your link show two lines starting 2004. What is the difference between the two lines on the chart - again is that reinvestment?

They bought their product in 2002, I take it it is just the chart that only shows five years??

Oh, would the performance chart allow for managment charges or would they be a further deduction???
Again thanks for your help

turbobob

Hi Gordon, "bond" is a word that has lots of different meanings. In this context it's a type of life assurance product that has a specific tax treatment. As Dunstonh says a life assurance bond is a "wrapper" which determines how it is taxed and a few other things. In order to be a life assurance bond, they have a nominal (largely irrelevant) amount of life insurance included with them - normally 1% of the investment, I think. An ISA is another kind of tax wrapper, and a pension would be another.

The funds that a life assurance bond invests in could be anything, from a cash fund to an emerging markets fund.

I'm not sure on the "income profile" thing. Is that the actual fund name? Note that with these bonds, you can often choose an income option - for example, you could set them to pay 5% p.a. of the initial investment monthly. Or I think in this case you could choose a "natural income" option which effectively pays out the dividends as an income.

The two lines - blue is a sector average (the average of all life companies distribution bonds against l&g's in red). I'm not sure Trustnet has data further back than 5 years? Morningstar.co.uk might. However, 2002 was towards the tail end of a bear market, like we are in now, and people who invested in 2002 would be fairing better today than those people who invested in 1999 or 2007 (top of the markets!).

EDIT I believe the chart would allow for management charges but it would not allow for income drawn from the bond - it would assume income is re-invested.

Fairwinds

turbobob wrote: »

The two lines - blue is a sector average (the average of all life companies distribution bonds against l&g's in red).

I'm now reading that the other way round - could you confirm - and the L&G is performing better.

the product doesn't have any life insurance - The documentation says " i have explained that the Dist Bond has a guaranteed death benefit which can be added to your policy - but you have declined this feature due to the cost involved"

turbobob

Blue/red - yes my mistake!!

Re. life assurance - my understanding may be wrong then. My understanding was that a nominal amount of life assurance had to be included within the product to make it a life assurance bond. Technically they are non-qualifying whole of life policies.

Myrmidon_J

soulwally wrote: »

Is this bond a good bet for growth? I'm thinking of investing £5,000.

As others have said, I think you are most likely referring to the Legal & General Distribution fund, held in a life assurance tax wrapper ("bond").

In your case, I'm not certain that Legal & General permit investments on this scale. As Dunstonh says, you'd be far better off (from a taxation perspective) investing in the 'Stocks & Shares ISA' wrapper - whatever the fund choice!

Fairwinds

Perhaps I should have started a new thread that post you are referring back to is nearly a year old.

I am interested in Dunstonh's comments about not being appropriate if they don't use their stocks and shares ISAs. They don't really invest in the stock market at all.

Their financial review describes their attitude to risk as LOW.

It also says that ISAs were considered but were unsuitable/ less suitable as their key requirement is for income. It then talks about another L&G fund ( managed monthly income trust) but this is ruled out on the basis that the income can vary.

I suppose my question is that after having been with this fund for 7 years should they stick with it as I have been suggesting

Myrmidon_J

GordonD wrote: »

I am interested in Dunstonh's comments about not being appropriate if they don't use their stocks and shares ISAs. They don't really invest in the stock market at all.

As I'm sure Dunstonh will point out, the 'Stocks & Shares ISA' is only a tax wrapper. Within this "wrapper", you can invest in a cash fund, if you like - the label has no bearing on the risk of the investment proposition.

Everyone should make full use of their annual ISA allowance, because of the tax advantages implicit in such an approach.

The question of whether to use investment bonds, or unit trusts / OEICs (after using the ISA allowance) is much more complex, and does depend on investment choice, as well as taxation.

It also says that ISAs were considered but were unsuitable/ less suitable as their key requirement is for income.

ISAs can deliver an income (or rather, the funds within the ISA can deliver an income), and far more efficiently than investment bonds.

I suppose my question is that after having been with this fund for 7 years should they stick with it as I have been suggesting.

Perhaps, from an investment perspective. However (and again, Dunstonh is far more qualified to comment), I'd consider a complaint on the grounds that the ISA tax wrapper was rejected. But I'm not sure what the outcome of such a complaint would be...

GM21

I assume that your in-laws are taking a fixed income from the bond - that is a set amount, there is no L&G Isa fund available that offers this. That is what the letter will be referring to when it explains why an Isa has not been recommend. Your in laws would have had to have had a variable monthly income from any of the L&G Isa funds.

dunstonh

I am interested in Dunstonh's comments about not being appropriate if they don't use their stocks and shares ISAs. They don't really invest in the stock market at all.

As commented already above by M_J, the stocks and shares ISA is just a container for investments. Those investments dont actually need to be stocks and shares. ISAs are a tax wrapper in the same way as pensions are and investment bonds are.

The L&G funds are available on all the main tax wrappers as well as being unwrapped (in unit trust form). The same fund will perform the same way in all the different tax wrappers with the exception of the charges, tax and maturity process.

Pensions will result in the largest fund value due to tax relief and tax free growth but they have a defined maturity process which is great for income provision but not so good for capital provision with its limited capital access.

ISAs are next with tax free growth and no further liability for income tax on income within the investments. Fixed interest investments can also claim back some tax within ISAs as well (important as the distribution fund does have some fixed interest holdings).

Next comes the area where it can get a little more complicated. Unit trust vs investment bond.

Investment bonds are the same as unit trusts for most areas of income within the investments. However, an investment bond is subject to tax at 20% on growth within the fund. Life companies still get an allowance which does bring it down a bit and in reality its usually between 10-15%.

Unit trusts are not directly taxed on growth but have a potential for capital gains tax if the growth exceeds £9600 in total in the year of encashment. Any growth above £9600 is taxed at 18%. However, you can avoid that tax fairly easily unless your investments start getting over the £100k mark. That is when the bond starts to look more attractive. That is a very simple response as there are other things that can swing it in favour of bond or unit trust. However, on a small investment, they would not be likely.

So, 20k should have been invested as follows £7000 each into ISA and the remaining £6,000 into unit trust. That could have used exactly the same investment funds but would have put £14k tax free and 6k more tax efficient (that 6k could have been transferred into the ISAs next tax year as well to make it all tax free).

Perhaps, from an investment perspective. However (and again, Dunstonh is far more qualified to comment), I'd consider a complaint on the grounds that the ISA tax wrapper was rejected. But I'm not sure what the outcome of such a complaint would be...

I've managed to put complaints in the past on this basis and have had them upheld. However, I have seen a few rejected as well as some rubbish excuse was documented which you know is fake but the problem is that as its documented, its hard to get round.

Their financial review describes their attitude to risk as LOW.

Low can still include some equity but a small amount.

It also says that ISAs were considered but were unsuitable/ less suitable as their key requirement is for income.

That is a bogus reason as ISAs are perfectly fine for providing an income. Indeed, the income is tax free unlike the bond as mentioned above.

HOWEVER, and this is big however, if the purchase was made via a bank, then the banks usually have cut down versions of the IFA product (and/or more expensive) and its possible that the bank's version didnt allow regular income withdrawals. If the product was recommended by an IFA it would be an easy mis-sale on that basis. However, if it was tied agent and their product didnt allow it then they will probably be able to get away with it as they dont need to give best advice.

I suppose my question is that after having been with this fund for 7 years should they stick with it as I have been suggesting

There is nothing wrong with the fund and it will zig zag in value. Always has, always will. However, if you accept that and want to continue then you should still cash it in and re-buy the investment in ISA and unit trust form to save on the tax.