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Assumptions bear no resemblance to reality

Standard Life is not alone in rushing to defend investment bonds (Money Marketing, April 3) under the guise of educating the adviser. Clearly, they are an important source of profit for insurance companies – and with commission of about 7 per cent, an important source of profit for some IFAs.

The potential investment returns and tax advantages could at the same time be more advantageous than other forms of investment for clients. A win-win-win situation (if I wore rose-tinted spectacles).

With insurance companies controlling the charges and the IFA controlling the commission, who do you think might be the loser if the win-win-win scenario turns out not to be quite as clear-cut as they would have us believe?

Despite all the reassur-ances, it simply does not pass the smell test.

I do not know what the justification exercise used by Standard Life would look like if it had used a realistic assumption for inflation – it might even have reinforced its argument – but to have an assumption of 2.5 per cent inflation is an insult to the intelligence of anyone with even the basic knowledge of economics.

The capital gains tax allowance increased by 4.55 per cent and 4.35 per cent in the past two years – more in line with the RPI than the CPI – and the assumption that should have been used by Standard Life (and the other companies going through this exercise to help IFAs continue to justify investment bond sales) is the future RPI figure.

Has Standard Life based its own future business plans on the assumption that inflation in future will be only 2.5 per cent? If so, shareholders, with-profit bond holders and IFAs should be concerned.

So the client has an annual CGT allowance but only uses it once, at the end of the 10-year period. Yes, right. I think that more frequent use of the annual CGT allowance is more likely than the scenario of no annual exemption in the year of exit. But then the figures would not favour the investment bond, would they?

The other glaring statement is “it is also assumed that no charges apply for either type of investment”. So when asked to demonstrate our TCF practices, are we expected to say to the FSA that our research into product suitability is based on an assumed future rate of inflation that bears no resemblance to reality and we ignore product charges because we assume that they are all the same?

Ian Pealin
Focused Financial Planning

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