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Battle of the bonds

Bringing bonds into the modern age raises a number of issues

Segments of the market are gearing up for a battle over restrictions limiting the portability of investment bonds.

Cofunds is teaming up with the Tax Incentivised Savings Association to lobby the Government to allow investors to switch investment bond provider without this being considered vesting and as such a chargeable event under HMRC rules.

Their argument is fairly straightforward and can be seen to have some merit. They claim there is the potential for consumer detriment, with tens of thousands of investors trapped in old life company bonds with restricted fund choices and/or in poor performing with-profits funds who will not switch bond providers because of the potential tax hit.

Added to this is the fact that, in the age of wrap and flexibility, the rules governing investment bonds seem positively archaic, particularly if you compare the tax wrapper with the likes of Isas or stakeholder pensions which are fully portable. There are undoubtedly benefits to consolidating all of an investor’s assets on to a single platform, too.

Cofunds and Tisa argue that the Revenue cannot lose money by supporting their proposals. They say if the Government allows investors in bonds with poor performing investments to switch without a tax penalty into other providers’ bonds where they are able to select better performing funds from a broader range of fund houses, then the Revenue will ultimately coin in more money as the underlying portfolio will be significantly bigger.

The campaign is still in its early stages but Cofunds and Tisa seem to be gaining the tacit support of a number of other platforms, such as FundsNetwork and Nucleus, as Money Marketing reports this week.

That is no great surprise as the platform providers all expect to be the ones to gain from any change in legislation in this area.

They have long been pitched as the arch-rivals, if not enemies, of life offices. This has particularly been the case since platforms expanded their original remit of being purely Isa and unwrapped fund providers and consolidators, which mainly took direct Isa sales away from the fund managers, to offer a wider range of tax wrappers.

One fund platform has even run a series of seminars entitled, The death of the life office. Today, it is not so clear cut, with the likes of Standard Life and, it could be argued, Skandia, having a foot in both camps.

Sceptics might say they do not expect the life companies to support this campaign and any lack of support or, indeed, lobbying against it could be seen as a defensive measure.

The platforms are arguing that any life company with products that are performing well have nothing to fear.

Where the argument does run into difficulties, however, is in the apparent assumption that most life company investment bonds are inherently bad and that the greater choice of underlying funds that the likes of a Cofunds or a FundsNetwork could offer will necessarily turn performance round.

Standard Life’s capital bond, for example, offers investors the choice of over 100 funds while Friends Provident’s investment portfolio bond has more than 70. This is surely more than enough choice for most investors or advisers.

Do they really want to wade through 800-plus funds on the platforms? Yes, the platforms offer filtering tools and yes, perhaps they can pick a couple of their favourite funds that are not available in their existing bond but is this likely to be taken by the Government as sufficient reason to change the rules, which would presumably need to be done through the next Finance Act?

Arguably not. We cannot forget that investment bonds are not just simple tax wrappers like Isas. Any switch between bond providers is not just an issue of sorting out an in specie transfer, which is still problem enough for much of the industry.

The new bond provider would also need to know the investor’s yearly withdrawal, gain or excess, chargeable amount and chargeable gain history. This is undoubtedly an admin headache that would need to be addressed.

For with-profits bonds, investors could also face market value reductions, particularly those in poorly performing closed with-profit funds. This also raises difficult advice issues, for example, around guarantees and terminal bonuses.

Then there is the issue of up-front commission and, for the cynic, the risk of churning. One could argue that investment bond business has to a certain extent been protected from the worst excesses of churning because of the tax implications. That issue would be removed, potentially sparking a commission war.

The premise of flexible, portable tax wrappers and investments is undoubtedly a positive but the issue of how bonds can be brought into the modern age might require wider consultation and co-operation to force the Government’s hand.

James Phillipps is news editor of Money Marketing


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