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International bonds not the top tool for IFAs

While onshore would be more attractive if the bonds were linked to a desired investment platform

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Bond writing is still popular among financial advisers but there is little love for offshore products.

Canada Life surveyed 201 UK advisers and found only 20% would prefer to write international bonds.

There has, however, been a small upward trend in the number of financial advisers writing international bonds in recent years, rising from 18% in 2018 and 17% in 2017.

What about onshore?

The survey found 23% of IFAs are not writing any onshore bonds, a marginal fall from 24% in 2018.

Among this minority, the main reasons for not doing so include a preference for wrapped investments (46%) and the perception of high cost (26%).

Neil Jones, tax and wealth specialist at Canada Life, said: “Onshore bonds remain a popular option for the majority of advisers who recognise their value as an important investment option.

“In many ways, bonds act as the bedrock for client portfolios across the industry.”

It’s not great news for providers, though, as the majority of IFAs (83%) do not intend to change the volume of bond business they write.

Benefits

Gordon Andrews, tax expert at Quilter, told International Adviser: “Offshore and onshore bonds have various useful qualities which mean they continue to remain popular among lots of advisers for tax and financial planning purposes.

“For example, the benefit of ‘gross roll-up’ in relation to offshore bonds should not be underestimated.

“This advantage derives from the fact that the bond provider is based in a tax-efficient environment and the investment and returns that accumulate within the investments within the bond do so virtually tax-free.

“Similarly, a change to the dividend allowance took place from April 2018, reducing the allowance from £5,000 ($6,419, €5,782) to just £2,000.

“This means many clients may now need to declare their dividend distributions and pay any tax due to HM Revenue & Customs.

“Bonds can be a useful tool to help clients avoid this process, as income and dividend distributions within onshore and offshore bonds do not have to be personally reported each year when the customer assesses their income and gains for self-assessment purposes.

“Unless there is a chargeable event, the underlying assets can be actively managed without considering personal administration and tax reporting usually associated with owning assets directly.”

Onshore debate

The Canada Life survey also found that three in five (60%) financial advisers agree that onshore bonds play an important role in the advice they give to clients.

Over half (56%) think that they are more useful than most advisers believe.

Despite this, some IFAs consider onshore bonds to have an image problem, as 63% believe that some of their peers will not consider writing them because they are perceived to be old fashioned.

Some financial advisers do not consider onshore bonds because they have high charges (33%), are not tax efficient (32%), and have a limited range of investment options (31%).

In terms of addressing this image problem, 56% of advisers argue that onshore bonds would be a more attractive proposition if there was more information regarding taxation.

A similar number (54%) state that these bonds would be more attractive if they could be linked to a desired investment platform.

Old fashioned

Jones concedes that “onshore bonds do have an image problem in some areas of the market”.

“They are seen as old fashioned and have a perception of being expensive, which is not necessarily true. Their benefits – such as deferring income tax and the ability to use top slicing relief – are perhaps overlooked.

“With no end in sight to the current turbulence impacting global markets, advisers looking for a sound option for their clients should seriously consider the inherent value in writing bond business.”

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