News Archive - March 2008
Investment Bonds versus Unit Trusts and OEICS (Oiks)
10/03/2008
The Chancellor's changes to Capital Gains Tax which will be introduced on 6 April 2008 have given insurance companies a headache. The new legislation has dealt another blow to a much loved product, the investment bond, which brings in millions for the insurance companies each year.
I think there is a lot of confusion amongst the general public regarding bonds - not surprisingly as there are several uses of the term when talking about investments. There are various National Savings products which are known as bonds (eg Income Bonds, Growth Bonds, Premium Bonds). These are generally cash-based savings products which offer lowish rates of return, but have the advantage of being guaranteed by the Government.
The type of investment bond I am talking about is an insurance contract without a fixed term. Millions of With Profits Bonds have been sold over the last 20 years or so, as a low risk medium to long term savings vehicle. Without getting too technical, the change in CGT has made the choice between Investment Bonds and Unit Trusts/OEICs (Open Ended Investment Companies) a much trickier one. However, some IFAs still use Investment Bonds exclusively for lump sum investments and do not consider the pros and cons of each option. Some might say this is driven by the higher commissions on offer, but in my opinion there is also an ignorance of the tax issues and a lack of expertise in portfolio selection which leads to bonds being used as a default option. Tied advisers from banks and the like often have a restricted selection of products they can recommend, which cannot be in the best interests of the client. There can be good reasons for using Investment Bonds (especially in conjunction with trusts), but equally a portfolio of OEICS can be a much better idea for some. If your adviser recommends a bond, ask why not OEICs? And if he or she gives you a blank look, my advice would be to get yourself a new adviser!