With-profits bonds are quite a simple sell. Compare a deposit account with a share portfolio and you see capital safety on one side and volatility – one aspect of risk – on the other.
The attraction of with-profits bonds is they offer you a better potential return without the commensurate increase in volatility. Risk still exists of course but it is a low risk.
Modern-day versions of the older with-profits concept have seen billions of pounds invested in the last few years as people look for both capital growth and income.
Technically speaking, investment bonds are not income-producing investments but if an investor strips out the bonuses and leaves the capital intact it sure looks like income to them.
Gloomy predictions are being made about with profits as annual bonus rates continue to drop but one leading financial institution is singing the praises of a 4 per cent deposit rate.
At least with-profits offers the potential for a terminal (we must find a better word) bonus if the investment strategy delivers extra growth.
Against a backdrop of modern investment mediums such as Oeics and corporate bond funds, there is still a place for the old investment bond.
Go and ask your research person to investigate the investment bond market and they will discover guaranteed investment bonds, guaranteed growth bonds, high-income bonds, guaranteed income bonds, property bonds, income distribution bonds, unit linked bonds and with-profits bonds.
These are all lump-sum investment products and are all derived from the simple concept of single-premium investment bonds.
One of the problems for this market though, is the way that these sub-products have been designed to operate as independent and often competing solutions to an investor's need. Marketing teams have also confused the distributors of these products, principally IFAs.
This is now being addressed in the industry by way of umbrella products, fund supermarkets and multi-choice bonds.
While these exist in the retail funds world (investment trusts and Oeics), life insurance funds can offer real advantages over these to some segments of the retail investment market.
In whatever tax world the multi-choice concept is packaged, it offers customers real consumer benefits.
Few of these arrangements though allow with-profits to mix with conventional unit linked funds. However, where this does happen, a customer can invest in a retail investment product and, provided they are happy with both the customer service and the fund performance, will never need to leave it.
What is right today may not be right in a few years time. Switching should be a prerequisite these days as we all face constant changes and challenges. There may come a point when with-profits investors will need to increase income and to achieve the required income they may need to invest elsewhere.
The option of a free switch to an income fund without having to leave the current investment product, would enable us all to retain valued customers.
Some investors are more active switchers than others. They may have entered the investment bond through a no-cost share exchange service. For these people, the chance to switch back and forth between funds without triggering a tax charge or incurring costs is a real consumer benefit.
Multi-fund investment bonds will save customers money compared with wealth management portfolio accounts and active product/ retail fund switching where exit and re-entry costs will be incurred. Take someone with £10,000 who tries to play the market for a quick gain but ends up with exactly the same valuation as when they started. Assume that investor switches from equity to cash and then back to equity. Now take a look at the comparisons in the table on the page opposite.
It is therefore important to understand all the charges that can come into play during the life of any chosen investment product/service.
Product providers often talk about their consultants developing a long-term business relationship with IFAs, so why should an IFA's objectives be any different with their customers?
If with-profits investors will have to move into a slightly higher risk fund to generate the income needed to meet their lifestyle then with more advisers adopting renewal commission, it follows that investors, IFAs and fund managers all share a common objective, which is to see the investment value grow.
For IFAs and fund managers, the more consistent a fund is, the greater the potential for more new business. Offer free switches out of poor performing funds without having to exit the product then this in itself allows the product to offer real long-term value to a range of customers Investment bonds provide a tax-efficient wrapper with an extended range of investment choice, income/withdrawal options and flexibility but aren't other investment products such as investment/unit trusts less taxing?
True enough for a lot of small investors but not necessarily so for bigger investors and higher-rate taxpayers.
The purpose of this article is not to get technical but some key principles of taxation need to be established. Investment bonds are life insurance funds and so are taxed as life products.
A consequence of this is that the fund value has to be reduced to reflect the tax charges on income and gains. However, investment bonds allow a withdrawal of 5 per cent of the invested amount free of any immediate liability to higher-rate tax.
On the other hand, an income from an Oeic is assessable to tax in that fiscal year. This 5 per cent allowance is available each year for 20 years (20 x 5 per cent = 100 per cent = invested amount) and thereafter the excess tax rate is the difference between the basic and the top rate (currently 18 per cent).
By the time you get to year 21 though, the investor may have retired and will perhaps be liable to basic-rate tax only. Under current rules, no higher-rate tax liability is the likely outcome.
I will leave the detail of the argument to another day or to Tony Wickenden.
Staying on the tax theme, investment bonds also lend themselves neatly to trust arrangements as most, if not all, life offices now provide standard trust packages.
This avoids costly legal fees, provided you understand the complex world of trusts. Investment bonds operate conveniently in loan trusts for IHT planning and for trustee investments.
A key sector in investment bonds is that of income distribution bonds.
These were developed in the late70s/early 80s, mainly as a result of disenchantment with other products in existence at that time.
The aim was to create a portfolio of assets that generated good steady income flows together with a decent potential for growth.
In those days, equities gave a return to investors in the form of dividends and capital growth with gilts generating the balance of the income.
I am not saying investment bonds are better than any other option. Rather, investment bonds have been around for a while and continue to develop alongside other retail investment funds/products in what is a world with only one constant – change.
There are many reasons for choosing a particular investment route. Some of the key ones are – risk, reward, volatility, service and tax.But most of all, I believe the portfolio that you build should be capable of adapting and changing.
Sooner or later, each investor is going to become an income-seeker and until then they will seek growth.
There is no Utopian product but, as a customer's life changes, so will their lifestyle and the personal solution that you recommend to them will be as important at the beginning as it is at the end. Simplicity is still the key to success.