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Advisers are wrong to break away from bonds

They say politics is more determined by negative drivers than positive. Clown-like or otherwise, Donald Trump, Nigel Farage et al are anti-politicians who embody many of the characteristics that people feel are absent from their mainstream rivals.

There has been a clear pendulum swing away from mainstream political institutions as wider disillusionment with the establishment deepens, which opportunists have captured well. But physics dictates that once the pendulum bob is displaced from equilibrium it begins a back and forth motion from one extreme to the other. So too, seemingly, with bonds, particularly of the onshore variety. Once a mainstay of the financial services suite the onshore bond has been somewhat beleaguered.

Chronic levels of misuse and abuse in the past have certainly not helped their image but there has been a noticeable move away from their inclusion in financial planning, even the though the days of high allocations and commission are a thing of the past. But should RDR, per se, influence the suitability or otherwise of bonds?

The commission ban may certainly have led to the correction of inappropriate use but there is a further sense from most advisers that the bond is becoming less relevant and I am not sure why when we look objectively at the benefits onshore bonds can provide.

RDR has not changed the tax benefits of bonds. But, tellingly, what it has changed is advisers’ processes which have become, as required, robust, repeatable and all the other stuff that has been talked about ad infinitum. The standardisation of investment advice processes coupled with the need, by many, to facilitate adviser charging through the product (adversely affecting 5 per cent withdrawals) has put bonds way down the pecking order. And not always correctly so.

Research we carried out in 2012 suggested strongly that the advent of the RDR would not have a negative impact on adviser propensity to recommend particular products in any significant way, with solutions remaining just as relevant post-RDR.

There was recognition that bond use would certainly become more niche but that niche would likely be far bigger than previously, as a) a far higher proportion of core advisory clients are likely to be higher-rate taxpayers and b) tax optimisation moves towards the centre ground of financial planning.

Well, it is certainly more of a niche but perhaps too much of one to suggest that a) and b) have happened to the extent advisers were anticipating.

Phil Wickenden is managing director at Cicero Research

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Phil Wickenden, you seem to be inferring that Nigel Farage is ‘clown-like’. Never forget that the man holds the distinction of being the most influential British politician of your lifetime. Without him, we would not have the ‘wonderful opportunity’ we now have as a nation. I did not vote ‘leave’ personally, but you should acknowledge the majority of people who did vote in the referendum seem to agree with his political views. Let’s have a little more respect please. To disrespect Nigel is to disrespect the will of the British people.

  2. It was probably more that other investments offer better options for a “standard” client. The proliferation of Bonds was probably historically led by commission and ease of setting up for the adviser.

    Increasing ISA limits and the invention of the dividend allowance (and savings allowance for Interest Payers) have made, for smaller investors at least, investment into OEICs and UTs more attractive. especially when you consider the fact onshore bonds are tax paid to a Basic Rate Taxpayer reducing returns(offshore bonds also sound to be a good investment for gross rollup but quite often end up with a sting in the tail due to changing circumstances and the payment of tax).

    Where appropriate the Offshore bond is however great for those who can benefit from the £5k starting savings rate band which together with the tax free allowance of £1k and nil rate band means a high allowance before tax is paid. These investors are less commonly found hence the reduction.

  3. Let’s also not forget that investment bonds, both on/offshore, were and still are a suitable investment for trustees to hold, given that they do not get the allowances that individuals get and pay tax at the highest rates. They are also an easier investment to hold in trust from a tax return perspective.

  4. Additionally, onshore bonds for wealthy clients (that have used all allowances), may make a re-emergence following the reduction in dividend allowance to £2k from April 2018.

    If you have fully used your dividend and other personal allowances, onshore bonds may be favourable for holding UK equity investments. This is because dividend income received by UK equity life funds within onshore bonds are exempt from (corporation) tax and any capital gains within the fund still attract indexation relief which reduces any tax paid within the life fund. Therefore the overall tax paid by a UK equity fund within a UK investment bond could be substantially lower than the 20% basic rate tax credit given.
    For a HRT, whilst they will pay an additional 20% tax on encashment, this is less than the increase in the dividend tax rate for HRT (i.e. extra 25%) and the tax actually paid within the fund could be as low as 10% (which again is much less than 32.5% they would pay if invested directly).

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