The market for international life insurance bonds has grown rapidly in the last few years as more advisers are seeing the benefits of using an offshore bond wrapper. Telling clients they may be able to choose when they pay tax and influence how much tax they pay on their investments is a message they obviously like.
Yet there has been no corresponding improvement in products’ transparency. In fact, complexity has increased. Life insurance groups have over the years launched one bond version after another, each with slightly differing price structures and commission terms. It has become virtually impossible for advisers to compare international bonds with any certainty.
One product may have a higher allocation rate for a specific contribution level, another might have a reduced initial charge for particular investors while a third might waive its admin fee and all can be interchangeable in certain conditions. This is not to mention the plethora of special offers and individual deals. It is all about as clear as the small print on a Government pamphlet explaining state pension benefits.
This is where investment platforms can really help advisers. By separating the wrapper – which is little more than a set of tax and admin rules – from the underlying investments, platforms can provide IFAs with choice while bringing price transparency to a market which has become hideously complex.
Crucially, the international bonds that are now available on platforms enable advisers to separate the product wrapper from the investment choice. In the past, IFAs who wanted to offer their clients the most appropriate tax wrapper had also usually to take the investment fund (be it in-house managed funds or with-profits) from the same provider, even though better investments might be available elsewhere.
The beauty of the open-architecture route is that an adviser can offer clients the best of both worlds – the tax arrangement that maximises net earnings from their savings as well as an investment fund that is not only most relevant to their long-term financial goals but also complements their existing portfolio of savings and investments.
Separating the tax wrapper from the investment vehicle also brings great benefits in terms of pricing transparency. It is now possible to see how much you pay for the tax wrapper and how much the investment costs. If standard pricing emerges for the international bond wrapper, advisers can concentrate on what is most important – the choice of investment funds.
The main platforms can do this because of the way they earn their crust. In a sense, they are largely indifferent to which tax wrapper an adviser recommends. This is because their revenues are based principally on the level of assets on the platform, not volume of sales. Their cost bases are typically far lower than established providers.
For life companies, the annual fee from the assets is only part of overall remuneration. On an international bond, they might typically levy an establishment charge and initial fee, as well as the annual management charge. There may be an admin fee, charged quarterly or annually, plus supplementary charges for additional statements.
In short, life companies are typically rewarded for selling the product to which investment fund and tax wrapper are inextricably linked. A key question to ask of the life companies is about potential cross-subsidies. Is a portion of the fees gathered on one product used to cover the expenses on another? In this scenario, separation of the tax wrapper and investment would be unhelpful.
Changes are coming. Advisers with long memories will recall that fund groups used to charge a premium for the Pep wrapper in its early years. Now, Pep and Isa wrappers are effectively free. In the world of personal pensions, there has also been a separation of tax treatment and underlying investment as charges have become standardised. Witness the changing face of self-invested personal pensions.
What has happened in the Sipp market may presage changes for the offshore bond market. Falling prices for the tax wrapper and improved price transparency mean the choice of investment funds or assets has come to the fore, not the choice of wrapper. Some life companies have been quicker than others to spot the implications of the Sipp revolution. They would be unwise to ignore the changes taking place in the international bond market.
David Dalton-Brown is head of FundsNetwork.