Portfolio bonds

[Gordon Brown]

Anybody know anything of them and the pitfalls?

I am having them recommended by my IFA as a way of managing the taxation on investments in the longer term.

It seems that as an insurance product there is no income tax payable upon release of the funds for none/ basic rate tax payers and as I am essentially self employed and heading for retirement in about 10 years I can control my income to make the most of that.

I know there are penalties for early cashing and that anything over the 5% annual release causes tax problems too but on the face of it as a long term investment why aren't these things more widely used.

If a thing sounds to good to be true, it usually is....

[Eric Mc]

You have to be absolutely sure that you will not have any need of that money for the specified number of years of the bond period.

I have a client who unwisely cashed in some bonds early (he had some sudden cash flow needs) and got clobbered for the tax on them.

That is their main problem.

[Gordon Brown]

Eric Mc said:

You have to be absolutely sure that you will not have any need of that money for the specified number of years of the bond period.

I have a client who unwisely cashed in some bonds early (he had some sudden cash flow needs) and got clobbered for the tax on them.

That is their main problem.

I thought that too Eric. I presme they work the same way for a business but can't get my head around just how they do that.

[Gordon Brown]

haworthlloyd1 said:

if you are a higher rate taxpayer or any gains make you a higher rate tax payer then you will be liable for additional taxation on encashment or withdrawals over the 5% cumulative allowance.

they are good but pay tax at 20% within the fund which is why anyone up to basic rate taxpayer level has no additional tax to pay.

upsides are (they contain an element of life insurance eg if you invest 100k and die and the investment had dropped to 90k you would still get back the 100k paid to your estate) so can suit older people, also because of this if you ever need to go into long term care (Where they take your house and savings) they can't touch the money in the investment bond unless you did it deliberately to get around that fact specifically.

downsides are that CGT rules are changing in april so OEICs (another type of investment you can consider) will now only be taxable for CGT at 18% and they don't really suffer any tax within the fund, apart from the 10% non reclaimable on dividends. As profit on OEICS is classed as capital gains (classed as income on a bond) you can also use your £9200 CGT allowance and also transfer across £7k (£7200) from next tax year into an ISA which makes it tax efficient. therefore OEICS are now looking a little more favourable than investment bonds in my opinion unless you like some of the advantages explained above - although you sound too young to need to worry about that.

HTH

I was attracted as I can control the amount I earn in any year and if need be stay a basic rate payer for the tax year(s) when the bond is ready for withdrawal.

[Gordon Brown]

haworthlloyd1 said:

fair point, but remember that the bond itself pays basic rate tax in the fund itself and therefore it is not tax free - you are simply not paying tax twice by withdrawing these 5% withdrawals. this can be misleading for people and your adviser may not be making this clear.

I will check that with he when she calls tomorrow. She is new so I like to check out what she is offering!

[darreni]

haworthlloyd1 said:

upsides are (they contain an element of life insurance eg if you invest 100k and die and the investment had dropped to 90k you would still get back the 100k paid to your estate)

That is incorrect, most portfolio bonds contain a life assurance element, paid as an extra 1% or 0.1% of the fund value on death.
Key phrase here is fund value, if you invested 100k & it had dropped to 90k, the the value payable to your estate is 90k plus 1% or 0.1%.