Skandia Capital & Income Bond ok?
|Investment | Life
Asked by peterjw, submitted
07 February 2011.
In March 2007 I purchased a Skandia Capital and Income Bond. The purpose being to grow capital and take tax free income up to 5 pc of the bond value.
Whilst I am satisfied with the income the value of the bond has obviously decreased beyond the market entry value. I realise that annual charges and withdrawals are applied but the current share index is some 20 pc higher now than when the bond was purchased i.e. 5250 March 07 - 6000 now. and yet negative growth stills applies.
Can you give a simple indication of any broad percentage growth that might apply purely as a measure for the aforementioned period
Are there any more viable options even within Skandia.
Answered by Justin on 08 February 2011
Your Skandia Capital and Income Bond is a standard insurance company investment bond. This means that all income and growth is taxed within the fund at basic rate and you can withdraw up to 5% of your original investment each year without any further tax liability at that time.
It's important to recognise that the 5% annual withdrawals don't reflect the income produced by investments within the bond (which may be higher or lower), but is simply a withdrawal of capital. Investment bonds are also not tax-free - the fund has already paid basic rate tax and you might have additional higher rate tax to pay when the bond is eventually sold (probably only likely if you're a higher rate taxpayer at that time, see our life investment page if you want a full explanation of how the tax works).
Let's suppose the investments within your bond return 4% growth and 3% income a year, a total of 7%, you'd expect the bond to increase in value by around 2% a year after the 5% withdrawal (ignoring charges). Likewise, if the investments return 4% growth but don't pay an income then you'd expect the bond value to reduce by about 1% a year after the withdrawal.
One of the advantages of using Skandia is that they offer a choice of around 500 investment funds to hold within your bond (list here). So your bond's performance will obviously depend on which fund(s) you hold. Even if you're invested in UK stockmarket funds it's unlikely their performance will have mirrored the FTSE 100 (hopefully it's better!), so it's difficult to apply a broad expected percentage growth for the period since buying the bond.
If you want to check the funds held in your bond and list them in the comments section below I'll take a look and try to gauge whether you should be concerned about performance to date. And, more importantly, whether they're appropriate for you.
Meanwhile, a very rough calculation based on FTSE 100 returns over the period. Let's assume you invested £10,000 4 years ago. I'd have expected about 5% to have been deducted as an initial charge (it might have been different depending the adviser's commission terms/deals applying at that time), so your £10,000 becomes £9,500. Since then the index has fallen from about 6200 to 6000 - a 3% fall. Annual fund management charges of around 1.25% plus Skandia's annual bond charge of 0.75% will have wiped c8% off the value, although annual dividends of around 3% will have added c12%. Take off annual 5% withdrawals and your initial £10,000 investment might be worth around £7,700.
Assuming an investment bond is an appropriate investment for you then Skandia is not a bad place to be, but it's important to ensure you're invested in decent underlying funds that are suitable for your needs. It's straightforward and free to switch funds within your bond, if need be.
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Readers' Comments (5) - To post a comment please register or login
Comment by peterjw at 6:31pm on 08 Feb 2011:
Thank you so much for your prompt and informative answer to my query regarding the Skandia Capital and Income Bond.
Your explanation was clear and concise as well as independent. I shall most certainly use your expertise again and will have no hesitation in recommending you to my friends.
Comment by Austin at 5:48pm on 10 Feb 2011:
Thanks for this explanation. I'm also interested in these type of investment due to their tax advantages so I read your link.
I'm a higher rate tax payer now, but will see myself not working in a few years. I have exhausted the ISA and CGT etc. and now looking at alternative tax efficient investments, perhaps VCT and these life insurance investment bonds.
If I invest in any fund now, unless they are purely growth (more risky), they pay dividend (Inc or Acc) that I have to pay tax on.
So, let's see if I'm right thinking, if I invest on these life bonds, and do not withdraw 5% (at all), this will work out to be an investment that pays basic rate tax on any dividend (income earned) and accumulate it until later years. Then I can sell the investment (when no longer a higher rate tax payer) and benefit as far as taxes (on dividend) are concerned ?
(P.S. I enjoy reading your detail answers, they are far better than forums and blogs etc.)
Comment by justin at 7:16pm on 10 Feb 2011:
Peter - thanks, glad I could help.
Austin - yep. that's pretty much the gist of investment bonds, except that basic rate tax is deducted on both income (dividends & interest) AND growth. It's not quite as simple as not being a higher rate taxpayer at redemption to avoid further tax, a calculation called 'top-slicing' is carried out to determine any tax liability. Rather than cover it all here, take a look at the life investment page for an explanation and example.
If you're using an investment bond to defer/avoid tax then an offshore bond should be more advantageous as no tax is deducted internally, so the investments effectively roll-up 'gross'. You'll still pay tax in the end but the benefit of gross roll-up can be especially worthwhile on larger sums.
But a word of warning. Investment bonds tend to pay higher than usual sales commissions, so if you decide to use one then consider using a discount broker or financial adviser who'll give some of this back to you.
Glad you like the site.
Comment by DougWardle at 8:13pm on 13 Feb 2011:
I also have a Skandia Bond invested in April 2005, the investments are with
SK Aberdeen Peoperty
SK Neptune Bond
SK Newton Managed.
I took an income from this bond commencing February 2006 however when the original capital invested began to reduce substantally I stopped doing this in July 2008
Although the FTSE has been doing well this last year the value of the bond is still well below the original investment which was in excess of £50,000.
Why is this?
What in your opinion would be a better vehicle, could be in Skandia ???.
Comment by justin at 6:33pm on 16 Feb 2011:
I think the main culprit is the Aberdeen Property Share fund, which lost around 40% in value over 2007 and early 2008. It's not a bad fund, but the global downturn hit commercial property funds hard.
Newton Managed is a sensible fund and I believe the Neptune Bond fund recently closed.
I'd be inclined to stick with Newton Managed and if you're bullish about prospects for property consider keeping the Aberdeen fund, although you might reduce risk by switching some money into a property fund that invests in bricks & mortar rather than shares.
Other worthwhile corporate bond funds include Invesco Perpetual Corporate Bond (a relatively cautious bond fund) and Aegon Strategic Bond (a bit more adventurous).
Another option is to use more managed funds (like Newton) that should spread your money more widely.