Investors may be being encouraged to churn their bond holdings simply to deliver additional commissions to brokers, warns AWD Chase de Vere head of investment steering group Anthony Coyte.
He says Budget tax changes are “inadequate justification to switch out of insurance bonds” and many people who are encouraged to move could be worse off after taking tax and charges into account.
Coyte says: “Investors being told to switch out of insurance bonds on the sole justification of the Budget tax changes are being duped. It could take up to nine years for a basic rate taxpayer using a bond to provide income to recoup the additional charges incurred by switching to a slightly more tax efficient collective with the same underlying asset allocation.
“It’s not quite as bad for those investing for growth, but even here the additional charges could take four years to recover. With these time scales bond holders will definitely be worse off in the early years if they switch.”
He says there may be good reasons for advisers to recommend a switch, such as rebalancing a portfolio, availability of more suitable OEIC funds outside the bond wrapper or poor performance of the current underlying investments in the bond.
However, they should be suspicious if they are being told to switch just because of the Budget tax changes, Coyte adds.
He says bonds still have a valuable role to play in clients’ financial plans especially for Inheritance Tax planning and remain effective for investors managing income within a trust structure.
“We expect to see sales of insurance bonds drop as a result of the Budget, but the doomsayers who say this is the end of bonds have got it completely wrong. For the right client with the right financial circumstances bond wrappers still have a valuable role to play in long term financial planning.”
Paul Bruns and Elaine Parkes
3,000 left to transfer
Record numbers of people aged 90 plus
From 3 to 10 October