Investment bonds have many virtues and certain restrictions. However, it is possible to get a lot more from them if you take the right approach.
Why choose an investment bond?
Using different tax envelopes can produce different results for investors and, with increasing awareness and knowledge, advisers are looking for a greater variety of assets that can be held in each envelope. For the right customer, it may be important to ensure that the widest possible investment choice is available in a single product package.
Investment bonds can offer a number of tax advantages, such as tax deferral and tax-efficient withdrawals – these advantages, and others, may appeal to some investors. The absence of any UK or local tax in an international bond can increase the potential for long-term growth, but also makes them capable of holding a myriad of investments, as they do not have to account for tax on income or growth within the bond itself.
Watch the collectives
In many cases, the underlying assets are collective investments, held directly through a platform or managed as a portfolio by an investment manager.
Platforms can be an attractive option for those looking to use a wider range of investment flexibility and can reduce bond provider transaction costs. However, the investor will pay a platform fee and therefore this will need to be weighed against the potential transaction fees. For example, someone who doesn’t often anticipate the need to change may prefer to invest directly under the bond because the transaction fees may be lower than the platform fees. For those who anticipate active and frequent changes, platform fees may be a more attractive option.
Using a discretionary investment manager means that the advisor and the investor can work together to select a suitable manager to manage a portfolio. The investor can then appoint this manager and he will operate according to the agreed mandate and in many cases he will do so as custodian, taking possession of the assets under the obligation.
What are the (usual) restrictions?
Whether the bond holds collectives, platforms, or a discretionary investment manager – and some bond providers allow a combination of all three – the underlying assets are generally limited to cash deposits and collective investments. For example, these can be mutual funds, OEICS, and investment funds.
The restriction is due to the Personal Portfolio Bonds (Tax) Regulations 1999 which effectively limits the type of asset that can be held under an investment obligation. Assets permitted under these regulations typically include life insurance funds available from the bond provider, mutual funds and OEICs, approved investment funds, and cash deposits. Other investments such as certain ETFs are also permitted, but in particular direct investments in corporate stocks and bonds cannot be held.
Investing in a wider range of investments, such as direct investments in stocks and corporate bonds, would break these rules and result in an annual gain of 15% – deemed attributable – regardless of the performance of the investment. . This can be very costly for the investor.
When selecting a discretionary fund manager, advisers and investors will want to do so based on the expertise and style of the investment manager. Restricting the investments in which they can invest could restrict the manager’s options because, unless he is managing tailor-made collectives, the investment manager will have to find suitable funds to use. These might take an approach similar to the internal style of the investment manager and for many this solution will be acceptable as the investment manager can select the asset allocation and the fund manager, which they believe is best suited to these assets. For example, some fund managers can manage North American or Far Eastern stocks better than others, and some can manage fixed interest assets better than others.
In some cases, due to the eligibility rules, the investment manager will create a portfolio in its own OEIC or mutual fund envelope and the bond provider will then be able to invest in the collective, provided that the fund to him -even respects the eligibility rules. Due to the cost of running a specific fund on this basis, this can be restrictive and not a viable solution for many investors.
Is there a better way?
Another option is to effectively remove the restrictions imposed by regulations on personal portfolio bonds.
The regulations state that when larger investments are used, the bond will be treated as a personalized bond if the underlying assets are “selected by, or by a person acting on behalf of the policy or contract holder or ‘a person related to it (or the policy or contract holder and a person related to them) ”. Removing or removing the client and their advisor from the management of the investments may mean that the rules do not apply and that the underlying investments that can be held are limited only by what a provider is in. Life insurance can invest because it is the insurance company that owns the underlying assets. This will include direct investments.
The investment manager can be appointed and appointed with a broad mandate agreed with the investor. However, any ongoing communication should go through the provider and not directly to the investor or his advisor and he should not be allowed to influence the selection of the underlying assets. While this type of investment may not be suitable for everyone, it can offer distinct advantages:
- The investment manager can build a truly tailor-made portfolio designed to meet specific goals, for example income generation. This can be useful when the investment has a specific purpose and could apply to fiduciary investments such as a discounted gift trust.
- The management style adopted by the investment manager can be used without being constrained by the style of the underlying collective funds used allowing the investor to potentially benefit from the expertise of the manager.
- The fees could be lower than using actively managed collective funds, as direct trading holding may be lower than trading and holding funds.
- The risk of inadvertently holding unauthorized assets is reduced as the bond allows for a wider investment choice.
How does the solution work in practice?
Due to the compliance process that must be put in place, this solution is not available for all international obligations. Canada Life offers this through the Premiere Europe account offered by Canada Life International Assurance (Ireland) as a standard investment option, known as the separate portfolio service. The Premiere Europe Account is a real bond with an open architecture allowing access to the widest range of investment solutions. These solutions include access to almost all authorized assets around the world, whether directly through their accounts, through a platform or through an investment manager. Unauthorized assets are available using the separate portfolio service with selected investment managers.
The advantage of having this solution as a standard investment option is that if the advisor and investor no longer want to use the service or want to start using it, then they can switch entry and exit. at any time without needing to redeem the bond. .
The use of Ireland as the jurisdiction for the supplier means that the investment manager’s fees should not be subject to VAT, due to the way the Irish Revenue Commissioners treat VAT on fees.
This investment solution can provide the right investor with a truly tailored portfolio that would not normally be available. This can help them achieve their goals and add value to a consulting firm’s proposition.
The value of investments can go down as well as up and investors may not get back the amount invested.
Neil Jones, Head of Market Development. Neil is an investment specialist with over 20 years of experience in financial services with life insurance and pension providers, and has worked as a professional advisor specializing in pensions, investments and estate planning.
About Canada Life
Canada Life is part of a group of companies controlled by Great-West Lifeco Inc., a diversified financial services holding company headquartered in Winnipeg, Canada. Through its subsidiaries, Lifeco operates in Canada, the United States and Europe. Great-West Lifeco and its insurance subsidiaries have received high ratings from major rating agencies.
Canada Life Limited, a wholly owned subsidiary of Great-West Lifeco, began operations in the United Kingdom in 1903 and serves the retirement, investment and protection needs of individuals and businesses. In addition to offering stability and security through its individual contracts, Canada Life Limited has become the leading provider of group insurance solutions at competitive prices. www.canadavie.co.uk.
Canada Life Limited is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Canada Life International Limited and CLI Institutional Limited are companies registered in the Isle of Man, authorized and regulated by the Isle of Man Financial Services Authority. Canada Life International Assurance Limited and Canada Life International Assurance (Ireland) DAC are authorized and regulated by the Central Bank of Ireland.
Canada Life Limited, registered in England under no. 973271. Headquarters: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Phone: 0345 6060708 Fax: 01707 646088 www.canadalife.co.uk Member of the Association of British Insurers.
Canada Life Limited is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.