AWD Chase de Vere warns of bond churn risk

Investors who are being advised to switch out of insurance bonds following the Budget tax changes could be worse off after taking tax and charges into account warns AWD Chase de Vere. Anthony Coyte of AWD Chase de Vere believes that investors may be being encouraged to churn their bond holdings simply to deliver additional commissions to brokers.

Anthony Coyte, Head of Investment Steering Group, AWD Chase de Vere 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.

"There may be many very 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 - but if an investor is being told to switch just because of the Budget tax changes they should smell a rat."

The Budget tax changes have made bonds less attractive for new investors in certain circumstances according to Mr Coyte, however they 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.

Anthony Coyte says: "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."