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Sell investment bond for unit trusts?

Investment | Life Helpful? 13

Asked by tj6079711, submitted 27 October 2010.

Open Quote I am approaching 65 and have a joint Investment Bond (my wife 61) with St James' Place. It has only grown from £40 to 90K over 14 years - I am a basic rate tax payer (my wife is non) and I have been advised by an independent finacial adviser to cash it in and reinvest it unit trusts and ISAs.

I am uncertain about the best course of action and would welcome your opinion. Our SJP partner seems to be more interested in what remunerates him best.
End Quote

Answered by Justin on 28 October 2010

Assuming you've not made any withdrawals or taken an income then £40,000 into £90,000 over 14 years equates to an annual return of 6%, after basic rate tax. Not great, but certainly not bad either.

My greater concern is that your wife is a non-taxpayer yet you have an investment on which growth and income is automatically taxed at basic rate tax which can never be reclaimed, not even by a non-taxpayer.

If your wife was a non-taxpayer when the St James' Place adviser originally recommended the bond then you may have a strong mis-selling case. They sold you an investment that was probably less tax efficient than alternatives. By all means pursue this with St James' Place and request suitable compensation if you feel appropriate.

Meanwhile, an investment bond probably remains tax inefficient given your position. The reason I say probably is that once you reach 65 you'll enjoy a higher personal income tax allowance. If your overall income exceeds £22,900 (under current limits) then this allowance will reduce by £1 for every £2 your income exceeds the allowance (subject to not falling below the standard personal allowance). Investment bonds have the advantage that annual withdrawals up to 5% of the original investment don't count as income in this context, so won't affect your allowance. However, when the bond is eventually encashed it could affect your allowance, effectively costing you 30% tax on income (which would include all withdrawals and gains on the bond) between £22,900 and £28,930 (based on current tax rates/limits).

Of course, even if you will benefit from the above your wife will be losing out, so it's still questionable whether the bond is worthwhile from an overall tax point of view. And if you decide to encash then probably better to do so before you reach 65 to protect your increased personal allowance (as described above).

Moving to unit trusts, within ISAs where possible, should be more tax efficient. Gains and interest (e.g. from corporate bonds) will be tax-free within ISAs and interest should be tax-free outside of ISAs when held in your wife's name (provided it doesn't push her above her income tax personal allowance).

Dividends from shares are effectively taxed at basic rate whether held inside or outside of an ISA, so no saving there. But at least gains from shares can be offset against your annual capital gains tax allowance (£10,100 during 2010/11), so with careful management growth should be tax-free, even outside of an ISA.

So, on the surface, the advice you've received to switch sounds sensible. However, a couple of caveats:

Tax savings are pretty pointless if performance is poor. So it's vital the adviser you use has decent expertise at selecting and monitoring/managing investments. If they're simply trying to make an initial sale and not bother looking after your investments in future I would be concerned.

Secondly, establish exactly how much switching could end up costing you, including any commissions paid to the adviser. For example, an adviser would usually receive 3% commission upfront followed by 0.5% a year for selling unit trusts. On £90,000 this means £2,700 initially and £450 a year - which you'll pay via investment via charges. Such initial commission would be excessive for what is a fairly straightforward piece of advice, so I'd be inclined to use a fee-based adviser who'll waive/rebate all commissions to reduce your fund charges. I think around £1,000 would be a fair fee (at most) for this advice followed by a few hundred pounds a year if the adviser will provide a proper ongoing service.

Good luck sorting this out.


Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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