The case for unit linked investment bonds post Budget
A key announcement in Alistair Darling’s budget speech was that the rules regarding Capital Gains Tax (CGT) for collectives will change from April 2008.Commenting on the changes, Mike Kalen, CEO, Hartford Life, said: “We welcome the simplified CGT regime and the opportunities it presents. We believe that investment bonds will continue to play a very important role in financial planning and will remain an effectiveproduct for many investors, especially those planning for retirement. The benefits include several important tax benefits only available in an investment bond.”
“The advantages of investment bonds are all the more apparent if customers take advantage of ‘Living Benefits’ and the guarantees they offer. These give investors the peace of mind that their future income will never drop, plus the potential for investment gains. Only investment bonds with these 'living benefits', like Hartford Gold with SafetyNet, can provide this valuable combination for investors.”
This means that investors have the potential to increase their guaranteed income and death benefit, which once locked in can never go down even if markets fall. Kalen said: “This could prove particularly attractive to investors who have seen the value of stocks and shares fall by as much as 20% since last summer. Holders of collectives do not have this ‘SafetyNet.’
Advantages of Investment bonds:
Where income is a key driver in the investment strategy. Bonds allow 5% cash withdrawals per annum, with the tax being deferred
Where the desired growth is driven wholly or largely by net dividend (income equities), interest (fixed interest) and rent (property), then an investment bond is likely to look attractive from a tax perspective
Where ease of switching and having a ‘hands off’ investment are key drivers in the customers investment strategy. With most investment bonds, a specific number of fund switches is permitted free of charge each year. This is not a disposal and no tax liability is incurred. This is not available to investors of collectives, who pay taxes when the collective is sold.
Good fit with trusts - Bonds are non-income producing assets therefore are ideal for trust arrangements. Collective investments can be placed in trust, but this would give rise to additional work for the trustees as a result of annual taxation reporting, any fund switch or a partial withdrawal.
Positive for age allowance - As withdrawals of up to 5% per annum do not need to be reported to HMRC, they are not included in the means test and do not affect some state benefits, including age allowance.
Potential sheltering for long term care costs - bond assets are not included by local authorities in the means test for long term care costs. Due to increasing longevity and medical advancements, more and more people need long term care. Although the investment must not be made in an attempt to avoid long term care costs, it may be comforting for investors to know that their assets will remain invested and could potentially be part of a legacy for their family.
The availability of ‘top slicing relief’ – which can minimize the amount of high rate tax paid. The example below shows the effects of a non-tax payer cashing in a bond held for 10 years, and applying top-slicing relief.
The Hartford Gold Advantage:
The Hartford offer unique optional guarantees, the Hartford SafetyNet and the Hartford SafetyNet For Life which offer clients a guaranteed level of income for 20 years or for life, even if markets go down
Cleint’s always have access to 100% of their funds (less applicable fees), plus clients can lock in up to a maximum of 10% of investment growth each year up to age 75 which can increase their income
By choosing one of the unique guarantees, clients can not only pass on the full amount of their original investment on death, but also any locked-in gains, less any withdrawals taken.