Investment Bonds
Author
Discussion

silentbrown

Original Poster:

10,083 posts

134 months

Wednesday 8th October
quotequote all
Our adviser is suggesting we put a chunk of cash in an investment bond (ISAs already maxed out). I *think* I understand how they work, but the premise for them being tax efficient is that you only encash them while you're a basic rate taxpayer. If you're still paying higher rate income tax aren't you going to get significantly more clobbered than if you just had equities and were paying CGT on the gain?

C69

929 posts

30 months

Thursday 9th October
quotequote all
Onshore or offshore?

This article gives a good overview of their different tax treatments: https://www.mandg.com/pru/customer/en-gb/our-produ...

Honestly though, if your adviser hasn't properly explained the product to you, then you should tell them to try again. Keep asking them questions until you're totally satisfied - that's what you're paying for.

mikeiow

7,327 posts

148 months

Thursday 9th October
quotequote all
C69 said:
Onshore or offshore?

This article gives a good overview of their different tax treatments: https://www.mandg.com/pru/customer/en-gb/our-produ...
[b]
Honestly though, if your adviser hasn't properly explained the product to you, then you should tell them to try again. Keep asking them questions until you're totally satisfied - that's what you're paying for.[/b]
^^^^
This!

If an investment is too complicated to understand, walk away!!

silentbrown

Original Poster:

10,083 posts

134 months

Thursday 9th October
quotequote all
Onshore, and thanks for the link.

Given the amount we're paying for advice, of course I'll be talking to them again. Asking on here is more of a sanity check that I'll be asking them the right questions.

alscar

7,097 posts

231 months

Thursday 9th October
quotequote all
There was a thread not long ago about Investment Bonds or International versions ( offshore ) and Phil (?) wrote a very articulate and great explanation of the benefits.
Fwiw we invested in the Offshore variety ( Ireland ) about a decade ago and the premise iirc was that we could withdraw up to 5% pa ( and then rolled up if unused ) of the original investment as an alternative to income from elsewhere.
All such withdrawals were tax free.
If you went over that 5% then income tax would be due.

silentbrown

Original Poster:

10,083 posts

134 months

Thursday 9th October
quotequote all
alscar said:
There was a thread not long ago about Investment Bonds or International versions ( offshore ) and Phil (?) wrote a very articulate and great explanation of the benefits.
Found it, thanks. Again that's helpful.

https://www.pistonheads.com/gassing/topic.asp?h=0&...

From that, this nails my concern: you absolutely have to have a plan in advance about how to get the gains OUT.
PhilboSE said:
So the product grows gross of all tax, and if you do so wisely, you can realise the growth tax free by judicious use of allowances. If you do it unwisely, you’re paying income levels of tax not dividend or cgt.
But, AIUI, it's not growing free of tax as the bond company has to pay 20% on all capital gains, so the growth is slower?

Simpo Two

89,845 posts

283 months

Thursday 9th October
quotequote all
Oddly enough my last IFA tried to sell me investment bonds too. I just didn't care for the complexity and rigidity of them.

PistonHead007

344 posts

49 months

Thursday 9th October
quotequote all
Investment bonds can be useful to trigger when you pay tax, not so much if you pay tax. Tax deferred, not tax free.

Investments in a GIA are taxed on an arising basis, income is taxed each year whether you take it or not. Gains as you sell something.

Investment bonds allow you to accumulate returns and make fund switches internally, without triggering a tax charge at that time.

Onshore you are paying an effective 20% tax internally, so when you withdraw if you're a basic rate taxpayer there's no more tax to pay. Offshore are not taxed internally, but are taxed when you withdraw. If you have space within personal allowance that part can be tax free.

The 5% allowance per year it's been in place is really just letting you have your original money back without a tax charge. It's 5% of the sum put in, not 5% of the current value. Can be rolled up and taken in bigger portions later on.

Direct tax comparisons at the same tax band will likely favour GIA as dividend and CGT is lower than income tax rates. It's best used as a tool for manipulating when tax is due.

There's also the ability to assign some/all of the bond to a different person before encashment, meaning you can get the tax to fall on someone with a lower rate than yourself.

Finally, there's top slicing relief which effectively annualises the gain, meaning you may avoid/reduce going into higher rate tax.