Legal and General's policy director of wealth Adrian Boulding has warned savers to beware of possible tax rate hikes.
He says a growing elderly population adding pressure to public spending could lead to tax raterises.
These have been kept low for the past 19 years since former chancellor Nigel Lawson slashed tax rates for top rate payers from 60% to 40% in the 1988 budget.
However, Boulding urged investors not to become complacent and advised them to protect themselves.
He recommends consumers pay income tax on savings today and invest the remainder in an insurance bond. This would ensure they would only pay tax on the bond’s growth and not the capital invested.
“If you invest through a bond, you pay now,” he says. “If you invest in a pension plan, you defer the tax for tomorrow’s rate.”
With the shortfall in retirement income growing all the time and the population living longer, Boulding says alternatives to pension savings such as insurance bonds would provide a much needed cushion for medical expenses and give the best tax advantages.
He says bonds prove more tax efficient than other routes as investors switching fund managers do not pay capital gains tax as they have not sold the bond, unlike unit trusts.
Boulding also recommends consumers paying top tax rates invest some of their portfolio in an insurance bond as money invested today benefits from current tax rates while the saver only pays capital gains tax (CGT) on any profit.
However, Mark Dampier, head of research at Hargreaves Lansdown, stresses lower tax rate payers should steer clear of investment bonds.
While Boulding believes consumers with at least £50,000 spare should consider insurance bonds, Dampier says the route would better suit people with at least £500,000.
“Investment bonds are grossly oversold because they’re only tax efficient to some people,” he says. “The providers pay huge amounts of commission on them.”
“Clients can get bombarded by a salesman selling them an investment bond,” he says, highlighting an e-mail he received about a colleague’s client.
"This guy had told him to sell out of all his ISAs and put £200,000 in an equity bond which is absolutely negligible advice in the extreme.
The trouble with financial advisers is some advice is first rate but the problem remains that the client doesn’t know anything himself. They haven’t done any research and they can’t even challenge it."
People below the top tax bracket would benefit more from investing in ISAs and a straight forward trust portfolio, Dampier says.
He highlights the benefits of a UK equity income fund which provides a yearly rising dividend, the opportunity to encash shares every year as well as take advantage of CGT allowances, which reach £7,280 for the over 65s.
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