Traded endowment provider Shepherds Group has launched a service allowing investors to take income f...
Traded endowment provider Shepherds Group has launched a service allowing investors to take income from underperforming with-profit bonds without eroding capital.
Under the converter option, investors use their bond as collateral for investment in a personal traded endowment policy (Tep) portfolio run by Shepherds, from which they can draw tax-free income.
Shepherds has negotiated a deal with the Bank of Scotland to lend against the bond.
The Bank of Scotland will lend up 65% of the bond's surrender value for investment in the Tep portfolio, with a minimum investment of £50,000 providing £32,500 for a Tep portfolio. While the bank is currently charging 5% variable interest on the money it lends, the investor is not liable for monthly payments, as the Tep rolls up interest and pays the total amount due at the end of the term.
As investors keep their original bond under this arrangement, they avoid surrendering at the bottom of the market when units could well be lower than the original purchase price.
The bondholder can retain the original investment with no further capital erosion until maturity, avoiding possible market value reductions and protecting the level of the final bonus payout.
The Tep portfolio diversifies the bondholder's single company risk by investing in second-hand endowment policies spread across a range of providers.
By not drawing money from the bond, investors can also roll up the 5% available for withdrawal each year without immediate liability to income tax.
Higher-rate taxpayers have used this feature to defer encashment of bonds until their taxable income falls as a result of retirement or a low income year in order to reduce or avoid the excess income tax payment on the chargeable gain.
Managing director of Shepherds Stephen Abraham said the consensus view that with-profits performance has plummeted is not entirely accurate.
'While the absolute level of yield changes with economic conditions, real yields are surprisingly stable, normally in the range of 4%-6% above inflation,' he said
The term to maturity on the Tep portfolio is seven years or more. Intermediary commission is 3% and charges comprise a 1.5% arrangement fee, 0.56% annual management charge and £75 solicitors' costs.
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