Synaptics

Increased fund choice, particularly the evolution and expansion of externally managed funds, has changed the investment bond market forever. Gone are the days when an investment bond meant being tied into the provider’s own funds and mutual funds were the only way to truly access the full fund universe.

The reality is that product choice is no longer driven by specific fund availability. Investors now have access to essentially the same types of funds, whether they choose to invest through a mutual fund, a bond or pension wrapper.

Product suitability is now more to do with the wrapper choice, and the associated charges and tax position within that wrapper. Advisers must think very carefully about the impact of the wrapper choice on a client’s personal circumstances.

If the media frenzy surrounding last year’s Budget was to be believed then investment bonds were dead in the water. The reality however, even with a reduction from 40% to 18% in the headline CGT rate, is that the case for investment bonds remains as strong as ever.

As investment bonds and mutual funds should both be viewed as medium to long term investments, the difference in tax payable over the longer term is much less than the headline rate suggests. Indeed, the impact of the changes will be felt mainly by higher rate taxpayers investing in growth not income) funds.

Indexation relief was previously available to mutual fund investors, this was then replaced by taper relief and is now lost completely. However, life funds never lost the ability to index gains.

Never has the old adage been more appropriate: don’t let the tax tail wag the investment dog. Unlike mutual funds, fund switching is often free with investment bonds and not a disposal for CGT, allowing portfolios to be re-balanced more efficiently. As non-income producing assets, allowing annual 5% tax deferred withdrawals, bonds are also ideal as trustee investments and life companies are particularly adept at offering trust arrangements at no extra cost for IHT planning.

It’s also important to compare the charging structures. In comparison with mutual funds, investment bonds often fare better on charges. For example whilst equity unit trusts/OEICS typically have an annual charge of 1.5%, the charge for the equivalent life fund is often only 1%. Whilst ½% may not sound much, it is important to remember that this is compounded every year that the investment is held.

Making an accurate comparison of charges and the tax implications of different product wrappers is not easy. For this reason, Zurich makes available their Zurich Wrapper Comparison Adviser Tool, to help advisers give an accurate and independent assessment of the most suitable solution.

The future

Evolution has been part and parcel of the investment bond market and we expect this to continue with providers becoming much easier to do business with as a result of the trend towards greater e-capability.

The FSA Retail Distribution Review supports the need for professional advice and a move towards Adviser Charging (previously Customer Agreed Remuneration), which will drive transparent charges and the need for factory-gate pricing, providing advisers and customers the choice of how they take and pay for advice.

We can expect the bond market to continue to flourish and evolve, with more fund innovation, further e-enablement, additional product features and valuable adviser tools to help support advisers and their move into the new RDR world.

Sterling

Zurich’s award-winning Sterling Bond provides advisers and their clients with both flexibility and innovation in design.

Its range of charging structures, including factory-gate pricing, provides great choice, flexibility and transparency for customers and advisers alike. All our structures offer unique no loss on death and accidental death benefit options as standard, plus a full range of trusts, which are supported by the Zurich IHT Adviser Tool. Add to this a range of over 200 carefully selected funds using a strong fund governance process, the market-leading Protected Profit funds and award-winning 5-star service, both offline and online, and you’ll understand why Sterling has been voted ‘Best Investment Bond provider’ by Moneyfacts for four years in a row.

To find out more about the Sterling Investment Bond and range of adviser tools, please speak to your Zurich Intermediary Group consultant.