Has the death of Investment Bonds been over hyped?
In recent years there has been a lot of talk in the financial services industry about whether investment bonds still remain relevant for individuals. We still believe that for the right person that they remain good advice for them. An investment bond is a product that allows regular withdrawals of up to 5% of the original amount invested each policy year without triggering any immediate tax liability. If the allowance for any one policy year is not used it can be carried forward to another year. The key thing to remember is that the tax charge is only deferred to when the bond is encashed and withdrawals will be taken into account in the chargeable surrender calculation and taxed as income in that tax year.
The fact that the tax is deferred means that there is no need to declare it on a tax return which for individuals that have not previously completed a tax return makes a big difference. It is a very simple concept which most people can understand. There are a number of alternatives to investment bonds which I will now look at.
The first alternative is a New Individual Savings Account (NISA) there are two main downsides for these in comparison to an Investment Bond. The first one is that the current limit that you can invest into a NISA is just £20,000 per tax year compared to an Investment bond which doesn’t have a limit. The second is that a NISA cannot be put into trust. A trust us a way of managing assets for people and can be used to pass on assets without them falling into your estate for inheritance tax. This means that it is not possible to stop NISA’s from being subject to inheritance tax. The benefits of an NISA are that any growth is not subject to tax nor is it subject to any income tax on income received.
The second investment that is often seen as an alternative to an Investment Bond is an Investment Account or Unit Trust. The way that a Unit Trust is set up means that individuals are not shielded from taxation it is merely a way of holding assets directly whether it be funds or direct shares. This means that any income generated from a unit trust is subject to tax and any growth is subject to capital gains tax.
The benefit upside to this is that you are able to use your own personal allowances for personal savings (currently £1,000 or £500) income tax (currently £11,500) and capital gains tax (currently £11,300) before you have to pay tax. This means that it is possible for an income to be generated from a unit trust without creating a tax liability. For a basic tax rate payer the rate of tax paid after using their personal allowances for income is 20% and for dividends is 7.5%. For a higher or additional rate tax payer income tax will be paid at 40 or 45% and 32.5% or 38.1% for dividends where the income falls into the higher or additional rate bands.
The benefit of using an Investment Bond instead of a Unit Trust is the fact that 5% of the original amount can be taken each year without any tax liability. If the funds are changed in the investment bond the gains are not subject to personal capital gains tax. This means there is more flexibility around the investment of the funds in an investment bond.
I have summarised the above in the table below.
As you can see there are a number of factors that need to be considered when making a decision on what investment product is right for you, so I would recommend that financial advice is taken each time. For any financial advice Bradbury Hamilton, are able to advise. Visit www.bradburyhamilton.co.uk or call Sheriar Bradbury on 020 7220 7274 for more information.