It is important to put these factors aside and look objectively at the benefits onshore bonds can provide. They are a valuable planning tool and a good addition to a professional adviser’s portfolio of investment solutions.
The desire for transparency over recent years has led many bond providers, such as Canada Life, to adopt a simple charging structure allowing clients to see clearly what they are paying and to whom.
Platform providers now also provide transparent unbundled charges too.
The new transparent world makes it much easier for advisers and clients to compare the cost of different tax wrappers.
The Select Account uses a single tiered product charge based on the value of the investment, similar to some platform providers. So, for example, a £250,000 investment has a monthly charge equal to just over £900 a year, or 0.36% of the investment. This is very competitive when compared to buying a collective on some platforms, where the annual platform charge can go up to 0.50% or even higher.
Internal tax
With onshore bonds the gains and income achieved by the underlying life fund is subject to tax, paid by the provider and, whilst some may consider this a disadvantage, it can be very beneficial as it allows personal tax to be deferred. This can actually help an investor pay less tax overall which is not necessarily a bad thing.
To understand this, the tax paid within the fund is as follows:
From an investor’s perspective, this tax is deemed equal to basic rate tax, despite the fact that the actual tax paid is generally lower than 20%. It could potentially be a lot less, depending on investment performance and economic conditions.
Personal tax for your client
As there is no ongoing personal tax liability for the policyholder, a bond is easy to administer and a lot less hassle than some other forms of investment. This can be attractive to clients and especially to trustees who want to keep the ongoing administration to a minimum.
A tax calculation is only required when a gain is realised on a chargeable event. This could be when the last surviving life assured dies, the policy is fully surrendered, there is a withdrawal in excess of the cumulative 5% tax-deferred allowance or if the bond is assigned for money or money’s worth. It can also occur on maturity but most bonds do not have maturity dates.
Let us look at an example of how this works. Eric is aged 50 and he invested £100,000 over a period of 8 years and his annual income when he surrenders the investment is £30,000. For simplicity let us assume that the money is invested in a growth fund.
Investment bond | Unit trust/OEIC |
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This is quite a difference in the tax position for a simple example. Some will say that, with a collective portfolio, the client could use the annual capital gains tax (CGT) exemption each year to reduce the potential CGT liability and this is prudent planning. But this involves calculating the capital and growth of each disposal from each fund. This will come at a cost and may not actually be done each year.
Let us look at how much a client needs to realise to fully use their annual CGT exemption.
Capital in the investment (Original capital less any previous capital withdrawals) | X | Amount being realised |
Amount being realised + remaining value |
The balance of any payment is therefore growth and potentially chargeable.
Over a period of time, more and more of the original capital is returned to the client and then reinvested, leaving the client with numerous funds each with their own CGT calculations, adding complication and additional work to the management of the investment.
Any unused CGT exemption is not carried forward so if insufficient capital gain is realised then some of the exemption will be lost.
Deciding factors
Arguably, many will view charges and tax as being the main factors when considering different tax wrappers, but as well as offering simplicity, especially from CGT calculations, a bond can offer other features, including:
The important message here is that onshore investment bonds should not be dismissed simply because there is tax within the fund. Every client will have different objectives. In some instances, a collective investment may be more beneficial than a bond and vice versa. Some clients may be better served by investing in both tax wrappers offering even more flexibility.
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Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland.
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