Investment Bonds

[Rollin]

I've been getting advice from a financial adviser regarding future retirement plans.

I will be due a DB pension lump sump at retirement and they keep suggesting 'investment bonds' for this.
I'm struggling to get my head around what advantages they have. Is it an way to avoid or reduce capital gains tax?
Could someone direct me to a site with a simple explanation?

[C69]

This is a useful guide: https://www.mandg.com/pru/customer/en-gb/our-produ...

If your financial adviser isn't able to explain the product's features, advantages and potential disadvantages to you, then I'd seriously suggest getting another financial adviser.

[Derek Chevalier]

Rollin said:

I've been getting advice from a financial adviser regarding future retirement plans.

I will be due a DB pension lump sump at retirement and they keep suggesting 'investment bonds' for this.
I'm struggling to get my head around what advantages they have. Is it an way to avoid or reduce capital gains tax?
Could someone direct me to a site with a simple explanation?

Random question. Is this SJP?

I don't see investment bonds used that often in the financial planning community.

[Rollin]

No it isn't them.

[Simpo Two]

Derek Chevalier said:

Random question. Is this SJP?

I don't see investment bonds used that often in the financial planning community.

My last IFA - about 10 years ago - recommended investment bonds for almost all of my savings. They seemed awfully dull and if they had any benefits he wasn't able to explain them so I declined.

[alscar]

I have held “ International “ investment bonds for a decade or so.
Effectively various Funds in a wrapper.
There appears various rules around the different providers offerings but generally they have to be held for at least 5 years ( some seem to indicate 8 years ), and then up to 5% of the current pot can be taken out as income each year ( again some are 4% and some slightly higher ) with anything less than this then added to the following year and so on.
These withdrawals are tax free given it was your original investment that provided the pot.
Iirc they also pay out a death benefit payment equal to the original investment.
Charges for the first few years can be “ expensive “.
Probably not particularly sexy , probably a bit boring but can provide a decent alternative to providing income.

[bitchstewie]

Don't advisors typically change some sort of setup fee for these?

[alscar]

bhstewie said:

Don't advisors typically change some sort of setup fee for these?

Yes hence my comment on charges which included these.
However the “ benefit “ of them to us far outweighs the charges both initial and subsequent amc’s given their returns to date and obviously their potential flexibility.

[Panamax]

My understanding is that "investment bonds" are beloved of IFA's because they generate nice commissions for the adviser.

N.B. See below, it appears my understanding was outdated. Nonetheless,

I'd start by asking for a full explanation of all charges related to the product, both up-front and ongoing.

Edited by Panamax on Sunday 24th November 17:48

[alscar]

Panamax said:

My understanding is that "investment bonds" are beloved of IFA's because they generate nice commissions for the adviser.

I'd start by asking for a full explanation of all charges and commissions related to the product, both up-front and ongoing.

I can only speak from my own experience but the upfront one off charge for them was no different to other investments.
Not saying you are wrong though !
Don’t think asking for all charges should differ from any other investment vehicle though.

[craig1912]

Panamax said:

My understanding is that "investment bonds" are beloved of IFA's because they generate nice commissions for the adviser.

I'd start by asking for a full explanation of all charges and commissions related to the product, both up-front and ongoing.

They don’t get paid commission.

[darreni]

craig1912 said:

Panamax said:

My understanding is that "investment bonds" are beloved of IFA's because they generate nice commissions for the adviser.

I'd start by asking for a full explanation of all charges and commissions related to the product, both up-front and ongoing.

They don’t get paid commission.

And haven't done for a very long time.

[Enut]

darreni said:

craig1912 said:

Panamax said:

My understanding is that "investment bonds" are beloved of IFA's because they generate nice commissions for the adviser.

I'd start by asking for a full explanation of all charges and commissions related to the product, both up-front and ongoing.

They don’t get paid commission.

And haven't done for a very long time.

Over 10 years now. But that doesn't stop certain PH members continuing to spout the same nonsense.

[Sheepshanks]

alscar said:

Panamax said:

My understanding is that "investment bonds" are beloved of IFA's because they generate nice commissions for the adviser.

I'd start by asking for a full explanation of all charges and commissions related to the product, both up-front and ongoing.

I can only speak from my own experience but the upfront one off charge for them was no different to other investments.
Not saying you are wrong though !
Don’t think asking for all charges should differ from any other investment vehicle though.

Yes, wife and I have Offshore Bonds, in Trust for our kids. There was an initial charge, but they were fairly involved to set up, but you can DIY. Ongoing charge is the same as everything else.

The main point for us was to set money aside for the kids without actually giving it to them, but the money remains fully available at any time. They start the 7 yr IHT countdown at the point the Trust is set up.

The somewhat bemusing thing to me is that, even though they're offshore bonds, the money is invested along with the rest of our SIPPS and ISAs and appears in the same portfolio, although I chose that the money in them is invested much more cautiously because the time-scale in which the funds might be required is uncertain. They can pay a tax-free income every year, or the proceeds can be reinvested.

[Rollin]

alscar said:

I have held “ International “ investment bonds for a decade or so.
Effectively various Funds in a wrapper.
There appears various rules around the different providers offerings but generally they have to be held for at least 5 years ( some seem to indicate 8 years ), and then up to 5% of the current pot can be taken out as income each year ( again some are 4% and some slightly higher ) with anything less than this then added to the following year and so on.
These withdrawals are tax free given it was your original investment that provided the pot.
Iirc they also pay out a death benefit payment equal to the original investment.
Charges for the first few years can be “ expensive “.
Probably not particularly sexy , probably a bit boring but can provide a decent alternative to providing income.

So if 100000 initially invested increases to 105000 after 1 year, which figure are you withdrawing 5% from tax free?

[Panamax]

Enut said:

Over 10 years now.

OK, that fits. It was a wealthy aunt of mine who got taken for a ride way back in the noughties.

Which brings us back to the question, what are the attractions of an Investment Bond?

[alscar]

Rollin said:

So if 100000 initially invested increases to 105000 after 1 year, which figure are you withdrawing 5% from tax free?

Assuming the minimum holding period is reached the withdrawal percentage of say 5% is based on the pot total at that point.

[alscar]

Panamax said:

OK, that fits. It was a wealthy aunt of mine who got taken for a ride way back in the noughties.

Which brings us back to the question, what are the attractions of an Investment Bond?

Answered above but in addition if you have maxed out on ISA’s they can be used as another wrapper with flexible use.

[alscar]

Sheepshanks said:

Yes, wife and I have Offshore Bonds, in Trust for our kids. There was an initial charge, but they were fairly involved to set up, but you can DIY. Ongoing charge is the same as everything else.

The main point for us was to set money aside for the kids without actually giving it to them, but the money remains fully available at any time. They start the 7 yr IHT countdown at the point the Trust is set up.

The somewhat bemusing thing to me is that, even though they're offshore bonds, the money is invested along with the rest of our SIPPS and ISAs and appears in the same portfolio, although I chose that the money in them is invested much more cautiously because the time-scale in which the funds might be required is uncertain. They can pay a tax-free income every year, or the proceeds can be reinvested.

I presume that any death benefits are also paid into the Trusts ?
Just checked and the death benefit quantum is based on date of death so my previous poor memory.

[Enut]

alscar said:

Rollin said:

So if 100000 initially invested increases to 105000 after 1 year, which figure are you withdrawing 5% from tax free?

Assuming the minimum holding period is reached the withdrawal percentage of say 5% is based on the pot total at that point.

This answer is wrong. The 5% is deemed return of capital and therefore not taxable. If not taken it can be rolled over so, in 20 years, you can withdraw the whole of the initial investment, tax free, however anything more than the accumulated 5% is a chargeable event and could potentially lead to tax consequences.

OP has your financial adviser recommended ISAs first? Also if the amount is not huge you can put the rest in non ISA investment accounts and simply bed and ISA into ISAs in future years (whilst making sue you're aware of any CGT issues). If they are recommending an investment bond BEFORE using ISA allowances I would seek advice from another financial adviser.