Unit linked bonds need to adapt to hostile market conditions

In its latest report, “Unit Linked Bonds in the UK 2007”, Defaqto examines the pressures that are undermining these saving instruments and how they will affect their appeal to investors.

The report examines the likely impact of the proposed introduction of the 18% flat rate of Capital Gains tax, the implications of the Retail Distribution Review, the growing importance of fund supermarkets and how life companies are likely to react to the growing influence of multi-manager propositions in the consumer investment field.

While all these influences are likely to cause serious challenges to the life companies, the report is far from pessimistic about unit linked bonds. For instance, as a result of CGT changes, IFAs are predicting a drop in business, with 71% seeing a fall of up to 25%, but it is far from terminal. The press coverage proclaiming the death of unit linked bonds seems greatly exaggerated as only 11.5% expect a drop in business of more than 75%.

Even unit linked with-profits bonds are viewed by many IFAs as products which could still have a future, with 50% of those who currently do not recommend them indicating that they would consider them again in the future. Overall, there is considerable optimism in the report that if the providers get the basics correct, then the future is anything but gloomy.

In this respect, the report carries very useful insights, gained from original research, into what IFAs want from providers and their financial products. While IFAs want both quality products competitively priced and administered smoothly, consumers want more certainty in performance and a known measure of security for their investments.

Commenting on the report, Fraser Donaldson, Principal Consultant – Investment said: ”While unit linked bonds are going through a rough patch at the moment, the product still has attractions and, provided these are capitalised on and properly promoted by the insurers, unit linked bonds will have an enduring place in many investment portfolios.”