Regular visitors to this website (and of course all Informed Choice clients) will be aware that our advice proposition precludes any ‘product bias’, in favour of any particular product or provider – what is right for each client is the only criterion.
It is fair to say, however, that some products, such as Investment Bonds, are still being designed and marketed on the basis that high levels of initial commission can be taken by the advisory firm.
The cost of this commission (as always!) is being paid for by the client in the form of higher charges and withdrawal penalties.
This continues despite the fact that by 2012 such products will no longer be appropriate, or indeed allowable as a result of regulatory changes to the way in which remuneration is structured in retail financial services.
So, with the caveat that anyone considering an Investment Bond should be wary of high commissions and opaque charging structures, there are some other advantages that could prove attractive.
This is particularly relevant with the recent increase in Capital Gains Tax (CGT) in the Emergency Budget, from 18% to 28% for higher rate taxpayers.
In particular, the ability to withdraw up to 5% of the initial investment in an Investment Bond as a tax-deferred ‘income’ might appeal to someone who could be paying CGT at 28% and/or Income Tax at 50%.
An Investment Bond could also be beneficial to anyone who is utilising their annual CGT allowance elsewhere, such as a stocks and shares portfolio, or via property dealing.
Investment Bonds are also a useful vehicle for Estate Planning, utilising trusts to reduce potential Inheritance Tax (IHT) liabilities.
If you are already a holder of an Investment Bond, it is also worth considering the pros and cons of cashing this in, (which might be appropriate if you are a basic rate taxpayer, and looking to utilise your annual CGT allowance, perhaps in conjunction with ISA investments):
Advantages
(a) If your Investment Bond has increased in value, you can ‘re-base’ the maximum tax-deferred withdrawals to a higher level.
(b) You can utilise CGT and ISA allowances in future tax years, by re-investing the encashment proceeds.
(c) You can use all or some of the proceeds to make a pension contribution, and benefit from the addition of tax relief.
(d) You can gift the proceeds to children/grandchildren, reducing your taxable estate for IHT.
(e) You can buy a nice car (yes – Financial Planning is also about spending, as well as saving and investing!).
Disadvantages
(a) If you cash in within the first five years, there may be encashment penalties.
(b) If your income is close to the higher rate ‘threshhold’ ( currently around £44,000 p.a.), you may incur additional tax liabilities.
(c) The value of your investment may have fallen, due to stockmarket volatility.
(d) If you are over 65, you could lose some of the benefits of the higher personal allowance for Income Tax.
(e) You may have already paid high commission charges, and face the further costs of re-investment.
Whatever your situation, you should always seek independent advice and, if you don’t fully understand the advice being given, get a second opinion!
