Things that are emotionally charged often lead to irrational perspectives and unhelpful behaviours. Let’s take the Scottish vote on independence: Andy Murray tweeted that “the No campaign negativity totally swayed [his] view” signing off with the rallying cry “Let’s do this”. Liam Gallagher, never the most objective of fellows, responded “Ur opinion is irrelevant as you live in England so U don’t get to vote”, followed by the invitation: “But feel free to toddle off back to Scotland u boring person”. (Note the words ‘toddle’ and ‘person’ were not used in Liam’s tweet).
We have a tendency to think in extremes. There is something in our cultural make-up which makes it difficult to think about minor corrections as we default to massive swings.
We have seen similar swings concerning the consideration and use of bonds over the last few years. Once a mainstay of the financial services suite the onshore bond in particular has been somewhat beleaguered and chronic levels of misuse and abuse in the past have certainly not helped their image. Half of financial advisers we contacted this month to discuss the use of bonds (on and offshore) in financial planning told us they are not relevant to their business. Now clearly there are a number of advisers who really just didn’t fancy talking to us, but there is a growing sense from many that the bond is a thing of the past.
Despite the huge swing to collectives (very possibly because “unwrapped” portfolios are the default option on most platforms and wraps), there are some very good reasons, articulated by far cleverer people than I (thanks Dad & Co!), why bonds (should) remain just as relevant. Briefly:
- Tax deferral
- Assignment to minimise the tax on “exit”. If tax is potentially payable following a chargeable event, another option is to unconditionally assign segment(s) of the bond to another individual who is on a lower or nil tax rate
- Investment bonds are classed as non-income producing assets; particularly useful where the portfolio growth is driven by reinvested income
- 5 per cent tax deferred allowance; a potentially very tax efficient and simple way to access funds from the investment to supplement or replace income
- Long-term care – the value of any bond should be excluded from any capital means test where it is invested in more than six months before any claim for benefit is made and claiming benefit was not a reason for investment – the dreaded “deliberate deprecation” test.
Phil Wickenden is managing director of So Here’s The Plan