Onshore investment bonds are more relevant than ever before, providing more flexible, financial planning-friendly solutions for clients across their life stages, according to Mark Lambert, head of onshore bond distribution at HSBC Life UK.
“Onshore bonds increasingly are being used due to the tax efficiency of this life wrapper and its ability to remain relevant as their clients financial planning needs evolve and they move through their investment life stages, covering their investment, income and inheritance needs,” Lambert says.
Paraplanners, in particular, are becoming aware of the benefits that onshore bonds offer, he says. “More often than not it is paraplanners who are leading the conversation with us.”
There are three elements driving the rising popularity on onshore investment bonds, Lambert explains. First is the new structure of bonds, which now offer open architecture investment, rather than, as in past offerings, limiting investment choice to the insurance company’s own fund range or mirror funds.
Second is the freezing of tax allowances and exemptions, currently for as long as four years, limiting the extent of tax efficiencies, with the ISA allowance, although not frozen, also unlikely to increase in the near future.
Third, in the Spring Statement, the Chancellor of the Exchequer said basic rate tax will reduce to 19% from 2024. “This helps the investment bond because the rate of tax that the insurer has to pay will also reduce at the same time. And cash dividends remain tax free into a bond also,” Lambert points out.
Lambert suggests that after contributing to their SIPP and ISA, there is now a strong argument for investors to consider onshore investment bonds for any excess investment, as due to the tax efficiencies, they make for a more attractive option over investing into a general investment account (GIA), for example.
“Clients with the larger available investment amounts will be using up their pensions and ISA contributions, and wanting a tax effective home for additional investments,” Lambert said. “This can make bonds attractive to those clients, as they can withdraw 5% a year for the first 20 years, with the ability to carry forward the 5% if not used in one year, and in addition there is top slicing.”
Bonds can also fulfil client’s ESG investment requirements. In a recent HSBC Pulse Study, research amongst financial advisers found increased demand for ESG options. “Some 38% of advisers that we spoke to had seen a substantial growth in demand from clients for ESG and sustainable investment propositions, while 60% had seen moderate or slight growth in interest among their clients.
“Within our open architecture, we have 30 investment managers who hold ESG /sustainable funds, with over 100 funds to choose from,” Lambert says.
Nearly half of advisers also saw a range of trust options as essential if they were to invest in an onshore investment bond.
“Within HSBC bonds, we offer a range of trust options, including discretionary and absolute versions of Discounted Gift Trusts, Gift Trusts and Loan Trusts.
Use of Loan Trusts in particular, has been increasing in recent years, Lambert says. “They offer distinct advantages, including a freezing of IHT liability while the investor still retains access to the original money in the bond, because the money is a loan to the trust.
“This provides a useful estate planning tool where people are conscious that they may have to pay for long term care costs, or they are simply not ready to give the money away via a Gift Trust.
“Then as people age and they realise they can give away the money, they can convert the Loan Trust, give up the right to have the money repaid, so they start the seven-year IHT clock ticking and it becomes a Gift Trust. Advisers and their clients seem to like that flexibility.”
