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Bonds of contention

Insurance bonds are still the right investment for certain clients and advisers have a vital role to play advising on the best course of action following this year’s Budget announcement.

It was no surprise to many in the industry that Chancel-lor Alistair Darling did not change the taxation rules for life insurance bonds last Wednesday.

Insurers and advisers have welcomed the clarification after several months of uncertainty, even though it was not the news that many were hoping for.

The introduction of a flat rate of capital gains tax of 18 per cent from April means that, in some situations, mutual funds are a more attractive investment.

Hargreaves Lansdown head of financial practitioners Danny Cox says investors who want to invest for growth would be better off in a unit trust, but he believes that bonds will still be useful in some situations – as a tax deferral mechanism for inheritance tax planning and for those who just want an income.

He says: “Advisers should be talking to their clients and understanding whether their products are still suitable for them. Money has been coming out of investment bonds, especially with-profit funds, for the past five or six years. I think these changes will just accelerate that process.”

Clerical Medical head of financial planning Tim Rees says that higher rate taxpayers could still benefit from in-vesting in bonds because no personal tax is paid until a chargeable event occurs, such as cashing in the bond, for example.

Higher rate taxpayers who are likely to become basic rate taxpayers at a later point, say when they retire, could therefore benefit from having no further tax to pay on the income and gains when they encash the bond.

Rees says bonds are advantageous because they allow the investor to switch between funds without triggering a personal tax charge and also can be given away without a charge.

This can be particularly useful for making gifts into trust as part of inheritance tax planning and for parents investing for university funding.

Rees says: “There are winners and losers to the Capital Gains Tax changes. In the mutual funds versus investment bonds debate, Clerical Medical believes that when the tax efficiency, relative product costs and administrative simplicity are compared, financial advisers will continue to recommend investment bonds.”

Legal & General wealth policy director Adrian Boulding says he is pleased the Government has finally made a decision because advisers have not known where to put clients’ money in the past few months, which has led to a fall in investment sales across the board.

Boulding says: “We see a strong future for both bonds and unit trusts. If you want to invest for growth then unit trusts have the edge. But if you are investing for income then bonds will have the edge. This clarity will enable advisers to do their job again.”

Prudential UK life and pensions managing director Gary Shaughnessy says the Government’s changes to Capital Gains Tax have created a lot of uncertainty for long-term savers.

He says: “Moving the savings goal posts in this kind of way cannot help achieve the aim of getting more consumers to save adequately for their retirement. The Government has dismissed the needs of millions of savers in a single action.”

But Shaughnessy says there are still many benefits to life bonds for consumers, especially for cautious investors, because capital guarantee options are only available through bonds.

Shaughnessy says with-drawals will still benefit from 5 per cent tax deferral and withdrawals do not reduce the customer’s age allowance or means-tested benefits.

Friends Provident life technical manager John Hendry says the changes make it difficult for advisers to judge what they should be recommending. He says: “There are plenty of things still going for bonds but, overall, the changes probably will increase the attractiveness of collectives over bonds.”

Norwich Union has pro-duced a guide for advisers to explain the changes. It highlights the benefits that bonds still have over other types of investments.

Norwich Union Life marketing director David Barral says: “It has introduced uncertainty into the long-term savings market for both advisers and their clients.

“Investment bonds will continue to offer other benefits, such as tax-efficient withdrawal, and act as an effective solution to reduce inheritance tax when placed into trust. However, the changes to CGT will mean that bonds for some cust-omers will be at a disad-vantage from a tax point of view compared with other investments.”

Axa head of pensions and savings Steve Folkard thinks there is still scope for the industry to continue lobbying the Government to revise the changes because the impact on bonds was an unintended consequence of the legislation.

But an ABI spokesman says: “We lobbied extremely firmly over several months and there was no doubt that the Government knew how the industry felt. Although we are disappointed at the decision, we know that bonds will continue to be an attrac-tive product for investors.”

BDO Stoy Hayward Investment Management research director David Knight says: “Broadly, under the new proposals, it appears that clients would be better off holding collective investments directly within the new capital gains tax regime.

“This contrasts with gains on investment bonds which, at encashment, are taxed as income at an effective rate for higher rate taxpayers of up to 40 per cent – though there are differences for onshore and offshore bonds.”


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