The personal investment and pension markets are now more difficult places in which to be an adviser.
However, it is important that you do not forget the enormous opportunities that still exist for your clients. Some of your clients, who have existing single-premium insurance bonds, will be dissatisfied with the opportunities for future returns offered by their current provider. There seem to be two main reasons why this might be so.
First, perhaps your client holds a with-profits bond which is invested in a life fund which has poor long-term prospects for future bonuses.
Alternatively, your client may hold a unit-linked bond with a provider which does not offer a true multimanager investment proposition, that is, a provider which does not offer both a leading manager of manager service and a wide range of funds to enable construction of custombuilt portfolios.
Only a few companies have identified this client need and developed enhanced allocation products to help manage the costs of transition to a more successful platform.
However, unlike the position for transfers of pensions, Isas or Peps, a transfer from one bond platform to another is an occasion when a tax charge may arise. It is therefore important to consider what steps, if any, your client can take to mitigate or even avoid any such tax liability.
Let us consider your client Gordon. He inherited £100,000 on his mother's death in 1984 and he was advised to invest this into a single-premium investment bond with a UK resident insurance company. Let us assume that it is now worth £300,000.
He now has taxable income of £31,400 a year. In common with many employees these days, he is also a member of a group personal pension scheme to which his employer also contributes.
Gordon is worried about the prospects for good returns from this investment bond and you believe that he will achieve better returns if he moves the money to a new bond. You have, however, identified the issue of tax. If Gordon surrenders his bond, then this would result in a chargeable-event gain of £200,000.
As his taxable income is right on the threshold of being a higher-rate tax-payer, no top-slicing relief applies.
Therefore, the whole gain will be liable to tax at the higher rate but with credit given at the basic rate. That is, he will suffer tax at 20 per cent (increased from 18 per cent on April 6), resulting in a tax liability of £40,000.
However, Gordon knows that if he is to have a comfortable retirement, he needs to provide for himself and not simply rely on the state provision.
If he wanted to make a personal contribution of £10,000, then he would only need to write a cheque for £7,800 as he would pay net of basic-rate tax of 22 per cent.
If Gordon was advised to surrender his bond in the year that he made a gross personal pension contribution of £10,000, then this would, in effect, increase the higher-rate income tax threshold from £31,400 to £41,400.
It would then be necessary for him to review the tax liability on the bond gain. As Gordon would now be a basic-rate taxpayer, topslicing relief now does apply. Therefore the gain of £200,000 will be top-sliced over the 20 years that the bond has been in force, giving a slice of £10,000.
The slice is added to his other taxable income to discover if it takes him into higher rates of tax, which it does not. As there is no higher-rate tax liability on the slice, there is no higher-rate tax liability on the gain. Thus, Gordon can enjoy the whole £200,000 bond gain free of any personal liability to tax.
Gordon has received tax relief on his personal pension contribution of £2,200 and saved £40,000 tax on the bond gain. These savings equate to tax relief of 422 per cent on his pension contribution.
In conclusion, you will see that it is possible for many clients to achieve significant tax savings on bond gains by making personal pension contributions in the relevant tax year.