Investment and risk

Insurance bonds are a type of collective investment scheme that are categorised as single premium, non qualifying life assurance policies. The...

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...et volatility

We will now look at the common features of these investments before moving on to features relating to specific product types.

These investments are structured as life policies. They are therefore subject to life assurance policy “qualifying” rules in terms of taxation. As only single premiums are invested, these rules will be broken and the policies will be treated as “non-qualifying”. There is therefore a possibility that on partial o...

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...dded to other income, place the investor into the higher rate tax band and cause an income tax liability. Any 5% allowance already withdrawn, will be taken into account in final encashment and should therefore be referred to as “tax deferred” rather than “tax free”! More about this in the taxation section later.

With conventional unitised investment bonds, the investor’s premium will be used to purchase “units” in the investment fund. Each unit will be valued so that for e...

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...stment has been held, or because of adverse market conditions

An annual management charge will be applied to the fund. Commonly with unitised funds, this is 1% of the fund value.

The level of volatility of respective funds will vary c...

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...vestor with less than he originally paid into the plan.

As mentioned earlier, accessibility to funds will not usually be a problem but could result in some kind of early surrender penalty being applied if the investment is only held for a short...

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...tioned earlier, accessibility to funds will not usually be a problem but could result in some kind of early surrender penalty being applied if the investment is only held for a short term.

Taxation of fund

Income

Savings income taxed at 20% eg interest from gilts, cash, bonds

Dividends from UK companies received net with no additional tax to pay

Non savings income such as rent is taxed at 20%

The expenses of an insurance company can be offset against its unfranked investment income (income other than from UK shares).

Capital gains

Are taxed at 20% subject to indexation relief.

Taxation of investor

There are a number of circumstances...

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...investment to produce the final liability.

The full formula for calculating a gain is: (encashment value + previous withdrawals) – (original investment + previous chargeable gains).

Higher rate taxpayers

It can often be useful for a higher rate taxpayer to effect investment bonds that are “segmented”. Instead of effecting one whole policy, in return for the premium paid, the investor will buy a cluster of segments (or separate policies) within the plan.

The basic structure of investment bond has already been discussed previously. We will therefore concentrate on the types of available investment funds that investors can select:

Managed fund

This type of fund is a popular default fund for investors who do not necessarily wish to concentrate on any specific investment area due to perhaps a lack of investment expertise. If will typically combine investment in UK equities, fixed interest funds, cash and property. Managers will hold and alter specific weightings of each asset type to create the most favourable returns. The balance of investments held in these fund types would provide some exposure to capital risk but would through appropriate diversification of assets attempt to not expose the investor to any very high risk investments. Usually this will be at the expense of unspectacular returns.

Cash fund

This fund will invest in money market cash based securities. It will normally be used as a “safe haven” for investors at times whe...

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...d’s term. This is because in times of high performance, gains made within the fund may be only partially paid as a bonus with the balance being held back so that the fund can still a pay a bonus if market conditions are poor.

There is no guarantee as to how much bonus will be given each year, but once added, it cannot be taken away from the fund’s value (but see MVRs below).

Most with profits providers retain the right to apply what is known as a Market Value Reduction (MVR) to surrenders in times of adverse market conditions. This is to ensure that investors’ withdrawals do not exceed the value of the underlying investments in the fund, thus protecting remaining investors. This adjustment would not apply on death or in certain circumstances if the investment is held for a certain number of specified years.

The basic structure of these funds is still as a non qualifying whole of life assurance policy, so the same rules apply as described above in terms of withdrawals and taxation.

The following bonds are structured (unless otherwise stated) as non qualifying single premium whole of life assurance policies.

Guaranteed growth bonds

These bonds are issued in limited issues (or “tranches”) to coincide with current market conditions

They grow at a fixed rate of “interest” as notified from outset

They will typically run for terms of between two and five years

The investor receives a guaranteed return at maturity including the origina...

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...ame time. Of course it should be mentioned to investors that in the event of poor stockmarket conditions, their returns could be unspectacular to say the least (i.e. worst case scenario is to receive a return of the capital invested)

Assuming that they are held to maturity, they are relatively low risk but if surrendered early, the investor may receive a value below their investment due to the fact that the underlying structure of investments may be complex and difficult to liquidate.

These plans offer a very high level ...

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...of the original capital is returned.

Generally issued by subsidiaries of UK life offices in countries such as Luxembourg, the Isle of Ma...

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...ents and relief or any time spent outside of the UK will be given against the overall gain arising.

Some investors want to have their...

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...d these days to non UK residents.