Despite its shortcomings, I’d like to think that the financial services industry is generally moving in the right direction – i.e. one where fewer customers are mis-sold inappropriate or just plain awful products.
So today’s announcement that Santander is to sell Prudential investment bonds through its branch network (from next year) leaves me both gobsmacked and angry – they’re unlikely to be tax efficient investments for most Santander customers.
Investment bond funds must pay basic rate tax on both income and gains. This can never be reclaimed so investment bonds are totally unsuitable for non-taxpayers and always less tax efficient than individual savings accounts (ISAs). Basic rate taxpayers are likely to pay less tax via unit trusts, where gains can currently be offset against an annual allowance of £10,100 a year. And although a few higher rate taxpayers may benefit from deferring tax via investment bonds, it’s invariably more beneficial for them to use offshore bonds rather than the onshore bonds Santander will be selling. You can read more about investment bond taxation here.
And what's the likelihood that a Santander adviser will take into account the impact on the age-related personal allowance of customers aged 65 and over when they encash the bond in future? Low, I suspect.
I’ve no idea of the commercial arrangement between Santander and Prudential. But as investment bonds tend to pay higher sales commissions than unit trusts and other lump sum investment products, I’ll let you draw your own conclusions as to why Santander has decided to sell Prudential’s bonds.
So beware. If you walk into a Santander branch next year and someone tries to flog you a Prudential investment bond, be afraid, be very afraid...