It seems that the Insurance Companies are getting a bit desperate about the plight of their Investment Bond sales.  It is worth bearing in mind that these are hugely profitable for the insurers because they lack complete transparency in most cases, so they can be loaded up with high charges, and they cannot be transferred to another company without triggering a tax charge (unlike, for example an ISA).  They have also proved to be a bit of a wheeze when it comes to commission because they can make a big payment to the adviser upfront (which means lots of sales) whilst neatly disguising its impact from the victim (sometimes called an investor). 

I do not like investment bonds for a number of reasons, which include;
  • Firstly, no client ever understands the taxation, either internally or externally and this causes problems for them.
  • Secondly, the internal tax (which is deemed to be equivalent to basic rate tax) on onshore investment bonds is unavoidable.
  • The investment bond and the investments it holds cannot be transferred to another provider, it must first be surrendered.

That is not to say there is never a case for using them, it is just that those occasions are relatively rare.

Billions of pounds worth have been flogged to the hapless British public by their, so called, advisers for huge amounts of commission over the years and it is now possible that this gravy train is about to hit the buffers.
Below is a statement copied from the website of one of the country’s leading insurance companies (based in Scotland) which, frankly, is misleading, in my opinion. 
An investor who purchases a bond as a higher-rate tax payer is unlikely to pay 40% on the gain from the investment bond on surrender because they plan to:
  • be a basic-rate tax payer in the year of encashment,
  • assign all or part of the bond to someone who is a non or basic-rate tax payer, or
  • plan to cash in the bond after they retire abroad.

It states confidently that a higher rate taxpayer is unlikely to pay 40% on the gain (in this instance on an offshore investment bond) because they may be a basic rate taxpayer, have assigned it to a basic rate taxpayer or will have retired abroad.  ‘Abroad’ is presumably a place where no tax need be paid.  Of course, it is possible that some people will retire to countries where no tax is levied but many, if not most, will not.  Also, assigning an investment bond to a basic rate or non taxpayer is all well and good but there would have to be a high degree of trust, something that does not always exist even between spouses, as the investor will have, effectively, given the money away.  Finally, what if they are not a basic rate taxpayer, remembering that the full value of the surrendered investment bond is added to their income if is an offshore bond?

I know the insurance companies are not going to like it but would not most people be better off with a Unit Trust, or equivalent, in the first place?  Far simpler, even before the recently announced tax changes.