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28.03.2008
Investors should hold onto their bonds, says Standard Life

Investors who switch from bonds into other types of investment product for tax advantage are likely to be no better off in most cases - and may actually be worse off in some instances - according to research by Standard Life.

While the Chancellor failed to use the Budget to bring the taxation of bonds closer into line with other types of investment, the company believes that investment bonds remain a suitable long-term investment vehicle for most people.

John Lawson, Head of Pensions Policy, Standard Life, said:

“Only in a minority of cases should advisers be thinking about moving their clients out of bonds into other types of investment such as mutual funds. Even then, advice would need to be based on a wide range of factors. Working out if the client will be any better off could be very complex decision and advisers cannot apply a broad brush approach – each case will be different.”

It was announced in last year’s Pre Budget Report (9 October 2007) that capital gains tax would be charged at a flat rate of 18% from 6th April 2008, regardless of an individual’s personal tax position or how long the asset had been held.

Meanwhile, investment bonds remain within the income tax regime. This means that basic-rate taxpayers will pay a tax charge of 20% on gains – broadly in line with unit trusts and mutual funds - but people who are higher-rate taxpayers, when they cash in the bond could, face a tax charge of up to 40%.

This has led some commentators to suggest that bonds are no longer a viable investment choice. However, this is contrary to analysis by Standard Life which has demonstrated that bonds continue to be a good investment choice, both for new and existing customers, in comparison to other types of investment (see notes to editors).

Advisers who have reason to believe their clients may be better off by switching from bonds into other types of investment need to take account of a range of factors such as the individual’s tax position, the value of the investment and how long they intend to hold it, the underlying asset mix, the rate of tax they are likely to be paying in future years, whether they have a spouse or partner they can assign the bond to and whether or not they are able to use some or all of their capital gains tax allowance.

Standard Life is currently working on an online calculator which will help advisers in providing their clients with the appropriate advice. The calculator will be easy to use and sufficiently flexible to take account of individual circumstances.

John Lawson said:

“There is a danger that existing investors, particularly higher-rate taxpayers, are encouraged to change horses by cashing in investment bonds and switching to another type of investment. For some people this might be the worst thing to do, particularly higher-rate taxpayers who expect to become basic-rate taxpayers in the future, as these people could end up incurring an entirely avoidable tax charge. ”

• Ends

For media inquiries please contact:

Jeff Newton
Direct: 0131 245 5386
Mobile: 0771 248 6190

Notes to editors

The tables below show, in high level terms, the investment vehicle that can potentially provide the higher net of tax return where a variety of asset mixes are held. The tables use five example portfolios with varying splits between UK equities and fixed interest.   

The tables are illustrative only. Actual outcomes for individual clients will depend on a number of different factors. 

For these examples, we have assumed a total gross return of 8.5% for UK equities (3.5% income and 5% capital growth) and 6% for UK fixed interest (1% from capital appreciation). For ease of comparison we have also assumed that no charges apply for either type of investment.

Table A (client uses annual CGT exemption once on exit)

Table B (client has no annual CGT exemption available in year of exit)

Note:  For either product to be highlighted as more tax efficient there must be a difference in the Reduction in Yield due to tax of at least 0.2% per annum.

Notes about the table:

• The table above assumes that a client invests a lump sum of £60,000 for 10 years. Inflation is assumed to be 2.5% per annum. The investment is not set up under trust.
• The CGT annual exemption is £9,600 at outset and is assumed to grow in line with inflation.
• These examples are for information only and do not constitute advice. No guarantees are given or responsibility accepted for the effectiveness of any arrangements entered into as a result of reading these examples.
• The examples shown are for illustrative purposes only and tax should not be the sole consideration when recommending a product. A full consideration of the client’s requirements and a client specific illustration will be required prior to making a recommendation.

The table above is intended to illustrate that:

• If a client has no spare annual CGT exemption when taking assets out of a Mutual Fund then they are likely to have been better off in a Life Bond.
• A client investing predominantly in income assets is likely to pay either a similar amount of tax or less tax if they invest via a Life Bond.
• A basic-rate taxpayer throughout will range from being either tax neutral or better off in a Life Bond depending on their use of CGT exemptions.
• A higher-rate taxpayer who will redeem assets as a basic-rate taxpayer or will assign assets to a basic-rate taxpayer is likely to be better off in a Life Bond. 

The information contained within this press release is based on our current understanding of UK law and HM Revenue & Customs practice at the date of publication. Tax relief may alter and its value depends on your financial circumstances.

No guarantees are given as to the effectiveness of any arrangements entered into on the basis of these comments.  Every client's circumstances are different and will require individual advice.

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