Keep hold of your bonds, experts urge older investors

Keep hold of your bonds, experts urge older investors

People whp own investment bonds issued by life insurance companies are being advised to hold on to them - despite tax changes that make them less attractive. Older and wealthier people often invest in these products (frequently known as 'single premium investment bonds'), which allow them to withdraw 5 per cent of the capital each year tax-free.

An unusual feature of single-premium bonds is that the capital gain on the value of the bond is subject to income tax rather than capital gains tax (CGT). Until now, holders of such products have been largely indifferent as to whether they were taxed under income tax or CGT, because CGT was payable at the same rate as the income tax they were paying. But from 6 April, CGT is being lowered to 18 per cent and bondholders will be paying more under income tax - 20 per cent for lower-rate taxpayers or 40 per cent for the higher rate - than they would under CGT.

This type of investor is now more likely to invest in unit trusts designed to produce capital growth, according to David Knight, research director of BDO Stoy Hayward Investment Management. 'From a tax point of view, the general exhortation now would be to urge people to look for the kind of investments that give growth rather than income,' he says.

John Hendry, life technical manager for Friends Provident, says: 'There will be a tendency to see this as a reason to move investments.' But he warns that existing investors should be wary of exit penalties,.....continued below

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which could make such a switch very costly: 'A lot of these products will have a penalty, if you come out in the first five years, of perhaps 10 per cent in the first year, going down to 1 or 2 per cent.'

The bonds are often sold for quite sophisticated tax-planning reasons and Knight thinks that unwinding them will not be worthwhile in most cases. It may not even be possible for certain schemes - especially so-called 'discounted gift trusts' into which some of these plans have been placed in order to reduce potential inheritance tax liability. The insurance industry had lobbied the Chancellor to maintain the existing tax attractions of these plans, but he said nothing about it in the Budget and tax officials have since confirmed they have no intention of doing anything.

Some of the money that would have gone into these schemes is now likely to go into Isas, whose overall annual allowance is being increased from £7,000 to £7,200 from 6 April - and the maximum amount of that sum that can be invested in a cash Isa rises from £3,000 to £3,600.

People who are not averse to risk will be able to invest more in Enterprise Investment Schemes (EISs) - up from an annual limit of £400,000 to £500,000. Investors get 20 per cent upfront tax relief on money they put into EISs, which exist to encourage the buying of shares in smaller, higher-risk companies.

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