Q. I invested £50,000 into a With Profits Bond in 2000 on the advice of my adviser. He has told me that as it hasnt performed very well, and because the plan has a 10 year option where there are no penalties if I cash it in, he is recommending I take out another With Profits Bond with a different company.
Reading articles on your website and others, this type of investment seems to have fallen out of favour. Why is this?
A. With Profits Bonds were incredibly popular in the 1990s and into the early noughties. In 2001, something like £15bn worth of this type of bond was sold. Even in 2008, £3.4bn found its way into With Profits Bonds.
You are right that this type of investment is not favoured by many financial planners. Some advisers do continue to recommend them to their clients – maybe the 7% commission from the product provider is too hard to resist…
There are a few negatives:
- they are tax inefficient as the fund is taxed at source at the basic rate
- even worse if you are a higher rate tax payer, you will be hit for more tax on taking any money out
- the often quoted ‘you can take out 5% of your money each year without a tax charge’ is simply a return of your capital and is tax deferred, not avoided
- the insurance company commonly also has penalties if you want access to funds
- these bonds lack transparency of what charges the company are taking annually
- high initial commissions could reduce the value of your investment
- there are many alternatives available for you to invest your money!
- and, crucially, the annual bonuses and returns from with profits bonds have been falling during recent years
And some positives:
- if you ARE a higher rate taxpayer (HRT) then you will only pay basic rate tax on the underlying fund during the life of the investment (providing you don’t withdraw more than 5% pa)
- if you then cash in the bond/it matures and you are still a HRT you could then assign the bond to, for example, your spouse/partner if they are a basic rate taxpayer. No further tax would be due in their hands at that time.
Remember, your adviser will have earned commission 10 years ago on this money, and by the look of it will be doing this again. Ask yourself if he is doing this for your benefit or his/hers?
