Investment bonds are marketed to savers who want secure, tax-efficient growth on their money. However, are they as genuinely as secure and profitable as they are made out to be?
Investment bonds are savings plans offered by Insurance companies ( sometimes in co-operation with banks) that represent a long-term investment which allows for limited access to one’s savings initially, but that provide growth in the long-term. They are a popular alternative to the uncertainty and insecurity of housing or direct stock market investments, especially for those wanting to supplement a modest income, such as those on a pension.
They are touted as a good way to get secure, long-term capital growth.
Investment bonds have been a popular success for investors and financial agents alike. Literally billions of pounds are invested in the product annually (although this trend has slowed as rival financial products have provided competition), as a result, many brokers who are compelled by the promise of commission seek to offer the package, whilst not explaining the risks in acute detail. This is something look out for, and to take very seriously indeed, as will be explained later.
The well-known “tax-efficiency” of the product is a key factor in its popularity, an attractive incentive for pensioners and other savers who want to be able to invest long-term. The income from the growth of the bond is not punitively taxed, and by putting one’s savings in IBs, because they allow for only limited access to funds, one’s normal tax status remains unaffected. If one has used up all their capital gains tax allowance, then investing in insurance bonds can be a good way to put money into a product that will shield it from CGT.
However, what detracts from the appeal of investment bonds is that there are other, arguably more tax-efficient investment packages available to savers: e.g. Unit Trusts and “Oeics”; and there is also the fact that whilst investment bonds do offer a yield, it is not always a spectacularly high one, given the time they take to reach maturity. The effects of inflation can further affect any gains made through this kind of investment.
Furthermore, those who use Investment bonds as a source of income will have to consider the income tax they will have to contend with, as opposed to the case of those investing in alternatives, who often only have to deal with capital gains tax- and then only above a certain threshold.
Whilst these are not strictly hazards for the investor, in terms of risk of capital losses, they do signify drawbacks to the product, in the form of disappointing comparative return for one’s input.
The very serious risks with investment bonds, however, are connected to the product being “mis-sold” by a broker, as a result of the agent being incentivised to get a client to invest against their interests, in order to gain a substantial commission. One of the main dangers in relation to this is when clients that are unfamiliar with financial jargon, or are not made fully aware of the conditions of their contract, unwittingly find that they drain their actual capital and lose the bulk of their savings. This can be because sellers emphasize the saleable, appealing aspects of the bond and skim over potentially problematic aspects of an IB deal. If someone offering investment management advice is reputable then they will always disclose their interests.
There are documented cases of sellers who have tried to present IBs, self-servingly or out of ignorance, as a universally-satisfying product for long-term savers whose needs could be better served elsewhere.
People have, for example, been offered an Insurance Bond deal that is a low-risk (i.e. lower yield) investment, but were encouraged to withdraw the maximum limit of capital allowed under contract (often about 10%) in the first years of the investment, only to find that the value of the fund had nosedived later.
As many investors in IBs are retirees, entire life savings can be at stake, or in some cases funds that are intended to be reserved for certain contingencies, such as in the cases of elder persons that may need to be taken into care later in life. A loss of such indispensible money would be tragic, although avoidable, if only the customer was made fully aware of the nature of their investment, and advised fully on what they were getting into.
To avoid such terrifying possibilities it more than pays to always remember that if one is being offered an insurance bond, that you should try to fully understand all clauses and conditions of contract and remain instinctively cautious in your dealings with commission-hungry agents. Being “mis-sold” an insurance bond is a criminal offence and complaints should be taken up and pursued with unreservedly if you feel you have been wronged.
Having said that, bonds are not a faulty or ‘dangerous’ forms of investment, and can provide the excellent service that has made them so popular with customers as long as mis-selling is removed from the equation.
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