When using using investment bonds here are some tips to watch out for.
Assets Wrapped In An Investment Bond
It is entirely possible to have a property fund inside an investment bond.
This same property fund can then be inside an ISA. Whilst inside the property investment bond the property fund will grow and pay basic rate tax.
There is a potential to pay higher rate tax at a later stage. An ISA grows free of tax and as such the property fund will under perform inside an investment bond.
A unit trust has a tax free capital gain each year of £10,100. Meaning that the £100,000 investment will grow at 10% and there would have be no tax on the gain. However, the majority of investments would be less than £100,000. If investors took the growth each year they could roll that straight into an ISA. And if there is a spouse they could too, as the allowance is per person.
Charges & Fees
A good tip to remember regarding Investment bonds is that they have disguised charges called ‘extra allocation’ rates which effectively hides any up-front charges by spreading them out over a period of five years or on earlier encashment. This means that any extra gained will be taken back along with their normal charges.
Understanding ‘The Plan’ Details
Investment bonds are sold as a ‘plan’ that gives the investor a 5% tax free income. With an investment bond you can take your money back (5% over 20 years).That’s all. There is no tax break as is often misunderstood. Remember too that a financial adviser gets paid 7% or 8% commission for an investment bond, whereas with and ISA only 3% commission is paid.
Save Money On Fees
Another great tip for using a wrap account over an investment bond is that the investment via a wrap allows access to most funds for the lowest price-often close to zero. In an investment bond the financial adviser visits every five years includes a new set of charges, these are eliminated using a wrap account.
Mirror funds is a fund inside an investment bond. In effect they are a disguised version of it. The mirrored versions are easily recognised as they have the name of the insurance company in front of the fund as per the AIG example. Don’t buy into these, they return less than the original funds.
*Please note, not all advisers work the same way, check with your own directly regarding fees etc.