Re: Life Bonds and nursing home fees

In message <hmi4g2pp2id2n0v5549fv2pr1kbgaovuap@xxxxxxx>, Noon <none@xxxxxxxx> writes
I was talking to a financial advisor yesterday evening about using the
money my elderly mother has to fund her nursing home fees. She
suggested a 'Life Bond' with a Life Assurance company which had a
flexible pay out rate and, it seems, a 101% pay-out of whatever the
value of the fund might be when my mother eventually dies. The LA
company manages the various shares within the portfolio of the bond,
it seems.

I'm due to get more details of what's involved in due course (and
should have a bit more time to check for myself tomorrow) but I
wondered if anyone was familiar with Life Bonds.

I'll obviously be asking for more details but presumably there's more
to it than just a portfolio administered by a company, and there must
be some aspect that's tailored to the relatively short life expectancy
of people in nursing homes.
Life Bonds, or 'Investment' Bonds as they are otherwise know are a very commonly sold investment 'wrapper', especially by those advisers who are really just 'salesmen'. They are pushed a lot because the initial commission is up to 7%, that is why Banks etc., push them too. They are technically life assurance products which is why you get the nominal extra 1% payout on death.

They are pushed on the basis of some sort of supposed tax benefit but this is usually overstated an explained improperly.

The adviser is going about this the wrong way round. She seems to be recommending the wrapper first, not identifying the correct assets classes to use. In addition, she seems to be investing a Bond in which the funds inside it are manage by the Life Company, which is very bad. Life Companies are generally useless at managing money, albeit there are one or two exceptions. If a Life Bond is the best thing for you (but see below) then it is better to use one that allows you to use a portfolio of Unit Trusts from a variety of decent Fund Managers in it rather than allow the Life Company to manage it. You can select from thousands of funds to make a portfolio of different funds which in combination reflect the investors attitude to risk. In other words you can have a 'safe' portfolio in cash or near cash or something speculative in eastern gold mines etc., It is generally better to put them in an offshore. There are one or exceptions to this such as ' distribution' funds which used to be only available form Life Offices but now a few investment houses offer them as UT or OEIC funds.

HMR&C allow you to take up to 5% per annum (cumulative) of the initial investment without any tax consequences until you have withdrawn all of the original amount invested. This doesn't mean you are getting 5% return, it is just a withdrawal limit. anything over this can be taken with basic rate tax accounted for but there may be more to pay if the investor pays, or is on the verge of paying, 40% IT.

The tax problem (which bond salesmen don't properly explain) is that all gains made in the Life Office Bond )i.e. income AND capital gains) are taxed, but because of the way this is calculated the effective rate is about 17 - 20%. This sounds good because it is lower that basic rate IT, but in fact it is a rip off because the investor is not benefiting from the CGT allowance and is paying tax every year rather than just when a gain is realised. If you accept the point that Life Offices are useless at managing money and want a portfolio of Unit Trusts then you may very well be better not having the bond wrapper at all and buying them directly. Although any interest or dividends will be taxed the capital gains will be subject to personal CGT rules which means it is highly unlikely any tax will be paid unless the investment, the gains and the income taken each year are huge amounts. Some advisers will now say 'but what if she wants more than £8.8k a year (The CGT threshold). Well the £8.8k is the level of GAIN over which CGT is applied, not the amount withdrawn. i.e. if £100k grows to £110k and you withdraw the £10k, on 10/110s of that is taxable gain, i.e. £909.09, so you can see that the CGT benefit is huge. Many UT companies, and those who offer 'supermarket' platforms such as Skandia & Fidelity Funds Network upon which you can build a portfolio of UTs form different managers, allow you to take monthly/quarterly/ annual withdrawals. These will not be taxed as income and there is no 5% tax limit. Charges are far less, the maximum commission is usually 3% and for larger portfolios most advisers will charge less than this.

So, on tax, cost and return basis, UTs are miles ahead of onshore Life Bonds. If a bon were to be used then Offshore Portfolio Bonds are very good and these days are as cheap, if not cheaper, than their onshore equivalent. This is because the 18-20% tax referred to above does NOT apply but any withdrawals over the 5% are taxed on the perceived gain. The income and gains within the Bond sufferes no internal taxation and therefore on a like for like basis the investors will benefit form gross roll up and you will get a better return offshore. You can put the same UTs as would have had on shore within them. Offshore Bonds do not avoid or evade tax, they merely defer them, but the end result still makes you better off. Another advantage of offshore is that you can also have a special type of bond known as a 'Capital Redemption Bond' which has all the features of a Life Bond but there isn’t a life assured so that on death it doesn't have to be encashed and cause a taxable event, it can be passed on to other owners. They have a maximum life of 99 years. When used with the right trust these bonds can also be used to get the dosh out of the investors estate after 7 years AND give an income for life without them being a gift with reservation.

Ask the adviser why she isn’t recommending a portfolio of unit trusts or an offshore bond. Is she an IFA? or a representative of a particular company?

How much is being invested and does the investors total assets exceed £285k?
--
John Boyle
.

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