Savings transfer to investment bond

[bobsmydog]

I was interested to find out if this advisor's Plan A would in fact protect you from using capital to fund care home and came across the following
https://www.ftadviser.com/life-insuranc ... are-costs/

Deprivation of assets

One area to pay attention to is around deliberate deprivation – investing in an investment bond on a life assurance basis, specifically because of care cost concerns.

Anyone who places funds into investment bonds, where a motive for the investment is to avoid a care fees charge, runs the risk of triggering the deprivation rules and having the value of those bonds treated as a capital asset for the purposes of means-testing.

Advisors used to take 5% upfront commission on investment bonds which amounts to a pretty penny in your case!

The 5% tax free is a red herring as income from ISAs is tax fee, as other have said.

Assuming the information in the above article is right, this doesn't save you tax nor protect your capital from care home fees but it probably does provide your IFA with a fat fee.

[Alaric]

I was interested to find out if this advisor's Plan A would in fact protect you from using capital to fund care home

You would hope it didn't work.

It would be wrong if you could hide half a million from being available to finance care by using a life assurance wrapper to hold exactly the same OIECs or unit trusts as could be held directly or through an ISA.

[argoal]

I have always invested my money myself in s&s Isas and cash Isas and have built up a considerable sum for retirement. A financial advisor has recommended that I cash in all my Isas and transfer them into an investment bond managed by him. I have already cashe my cash isas and my index linked saving certificates and am holding proceeds in my current account prior to handing over to him. I am starting to wonder if I am doing the right thing. any advice would be appreciated

I totally agree with the other posters here.

The advice that you have been given by the advisor is so poor that I can only believe the 'financial advisor' is probably not an IFA but a salesman for an overseas investment bond. Moving money out of a tax shelter is almost always the wrong move. For you I'm 100% sure it was the wrong advice (for you rather than the salesman).

Overseas investment bonds are unregulated (think cowboys and the Wild West here) by the FCA (UK financial regulator) so you would have no recourse for a mis-sell and have no access to compensation if the company selling you the bond went bus or was a rogue.

As others have said, investment bonds are not providing tax-free income. They are tax deferred so that any gains will have tax to pay on them after 10 years or so and the 5% income you mention is treated as a return of capital (i.e. spending your own money). There is if course no guarantee of any gains from the bond which will probably have some pretty steep costs involved (5% initially plus 2.5% per year).

Any income drawn from an ISA (say 5%/year) is also tax free as are any gains to the remaing capital. In short ISAs trump Investment bonds every time.

If you could provide details of the exact product that you have been advised to take it would be easy to establish its status and charges if it is an FCA approved product.

[argoal]

One thing that I forgot to say.....

Don't rush into anything. There is no hurry to make a decision on how to manage your finances in retirement.

Take time to learn about the options available to you (SIPPs, ISAs, Annuities etc) understanding the plusses and negatives of each. And please come back with any further questions that you have.

[OLTB]

I'm 67. He says I can take 5% per annum out tax free and all the money will be sheltered from potential care home fees

Hi emmabeth

The 5% income is not tax free - it's tax deferred. What you're doing with this 5% 'income' is taking your initial capital back, hence there's no immediate tax. After 20 years, you will have withdrawn all of your capital (5% x 20 = 100%) and what is left is investment growth which is potentially taxable depending on your tax position at that time. Also note that if your IFA is taking fees from your investment bond they've recommended, this is included in the 5% tax deferable income. This means that if they (the IFAs) are taking 0.50% as an annual fee, you would be allowed 4.5%. If you exceed 5% annually, this excess would be classed as a 'chargeable event' and possibly taxable (again, depending on your tax position).

The care home protection comments are based on current CRAG (Charging for Residential Accommodation Guide) rules adopted by Local Authorities (LAs) - paragraphs 53 and 54 if you're interested!. Investment Bonds can be disregarded by LAs if they are written on a capital redemption basis, but take care as they (the LAs) can also make a charge against the estate if they suspect that the motive for setting it up would cause a deliberate deprivation of assets. There may be many reasons why the IFA thinks an investment bond is a good wrapper for you above other tax efficient wrappers like existing ISAs but the favourable treatment of a bond wrapper in terms of care fees should be considered a benefit, rather than as a reason.

All the above subject to change of course and a future Chancellor may change the rules!

Cheers, OLTB.

[Wmnr]

Hi emmabeth

Two separate things to be careful of here. One is the advisor. Are they an IFA? Are they FCA registered? Do you have any independent recommendations? It's a lot of money to be involved in your first transaction with this person. I suspect their commission will be 5% which is a big incentive for them.

Secondly, is the investment the right one for you. Investment bonds are a complex area, whether they are onshore or offshore and involve a number of tax rules.

I have recently cashed in a number of investment bonds set up by a relative so have seen the full lifecycle of these things. You can take 5% of the original amount out every year with no tax to pay on it because it's classed as a return of capital. This might not be ideal if you want an inflation linked income.

The bonds I'm familiar with were set up as trusts to minimize IHT. I'm surprised yours would not be set up as trusts. But I'm not familiar with which assets count when working out care home fees


As others have said, there is no rush

[TUK020]

I would suggest that at the very least, you cancel/put on hold cashing in any more ISA funds, until you are clearer about where you want to go.
tuk020

[Spet0789]

100% agree with this. Leave your money where it is for now. Don’t lose another penny of your valuable tax sheltered ISA capacity until you are sure that this is the right way to go.

[hiriskpaul]

I've never posted on here before but have been a long time reader. I have always invested my money myself in s&s Isas and cash Isas and have built up a considerable sum for retirement. A financial advisor has recommended that I cash in all my Isas and transfer them into an investment bond managed by him. I have already cashe my cash isas and my index linked saving certificates and am holding proceeds in my current account prior to handing over to him. I am starting to wonder if I am doing the right thing. any advice would be appreciated

I would endorse what others have said. An offshore bond does not seem to be an appropriate investment and should not be being recommended by a true FCA regulated IFA. I would even go so far as to say that this smells really bad and could be a scam.

[Clitheroekid]

I would agree with the other posters, and advocate extreme caution.

If he is getting 5% commission that amounts to £25,000! Would you seriously pay £25,000 to anyone for work that is extremely simple and took just a few hours? How much research work can he have done if he's just recommending you put everything into a bond sold by his company?

I have in my professional life come across dozens, if not hundreds of financial advisers, and although they vary a lot I wouldn't describe even one of them as genuinely honest and more concerned about the client than themselves. This includes IFA's with all the tick box qualifications, such as Chartered Financial Planner.

A solicitor recommended him.

Sad to say, this no longer (if it ever did) means that the recommendation can be trusted. Many solicitors these days are struggling to make ends meet, and there are also quite a few who habitually sail close to the wind. I'm afraid the recommendation may be motivated by a chunky kickback from the financial adviser, either official (in which case it must be disclosed to you in writing by the solicitor) or `unofficial'.

You seem to have done a very good job of investment without the involvement of an IFA, and as has been said if your motive for doing this is to try and avoid care home fees it may well not work. Again, it wouldn't surprise me if the FA was lying with such a huge commission in prospect.

Although I don't trust IFA's as a species, if you are still intending to go ahead I would at the very least recommend having the proposal `health checked' by an IFA that operates only on a fee income basis - i.e they charge you by the hour and don't take commission. I can't imagine that it would take more than 3 or 4 hours' work to look at the proposal, and at least you would know, so far as you can do, that he didn't have a hidden agenda.

[LooseCannon101]

This transfer to an investment bond sounds bad... really bad!

As has been mentioned by others, moving money out of an ISA is usually wrong. So-called advisors and solicitors who recommend such action, should be prosecuted.

It sounds to me that the original policy of investing in ISAs, was correct, and that this scoundrel has hoodwinked you into moving into a bond which will earn him a large lump sum.

[Mike88]

In addition to the excellent advice offered by others in relation to income, the OP should consider the fact that the average length of time a person resides in a care home is only around 2-3 years so the OP's total resources are unlikely to be at risk if residential care is required. Is it really worth risking investment in a single product giving the salesperson huge commission plus an ongoing fee simply to save money?

In any event local authority funded accommodation is not that great so if the OP has over £500k in investments wouldn't he want to use his own money to secure quality residential care rather than the basic article funded in whole or part by a local authority? I would avoid the investment bond like the plague especially as the motive for buying it is seriously flawed.

[petronius]

Cutting through all nuanced arguments, I feel that the OP urgently needs clear, simple guidance at this point, as he/she is most likely being scammed.

1. Don't withdraw any further funds from your ISA accounts. Stop any order you can stop.

2. Do not give this "financial advisor" a penny. Do not invest in anything they propose. Ask them for a written justification of their proposed strategy.

3. Seek independent advice and consider suing the "financial advisor" for the loss you incurred by withdrawing funds from your ISAs.

You have been warned.

[xxd09]

Agreed-beware!
xxd09

[PinkDalek]

...
1. Don't withdraw any further funds from your ISA accounts. Stop any order you can stop. ...

As far as I can recall from this Topic, the OP has thus far cashed in the cash ISAs (with the talk of further withdrawals or S&S disposals soon). I don’t think it’s been mentioned to date but, if these are by any chance Flexible ISAs, the cash could be placed back into the Flexible ISAs (if in the same tax year as withdrawal), should the OP so desire.

Hopefully the OP will soon return to the Topic and I hope hasn’t been put off from updating us further. We don’t really know enough to be sure about being scammed and such wording may make the OP embarrassed to post more. Don’t be ...

[Alaric]

[ I don’t think it’s been mentioned to date but, if these are by any chance Flexible ISAs, the cash could be placed back into the Flexible ISAs (if in the same tax year as withdrawal), should the OP so desire.

The USP (unique selling point) of the advisor's sales pitch appears to be that putting assets into an Insurance policy protects them from being assessed as wealth for Local Authority care costs. From a purely investment viewpoint, assets in cash ISAs can now be switched to S&S ISAs so that's not a justification for winding up cash ISAs. It's a useful observation that the transfer from cash ISAs to unsheltered accounts may be reversible.

It's a legal question as to whether this loophole (putting assets into an Insurance policy) actually works. It's noted that "deprivation of assets" rules may well be relevant.

[emmabeth]

Sorry for delay in responding, I've been waiting for the IFA's report.
Firstly, thanks for all the replies which gave much food for thought.
The proposed wrapper is an overseas investment bond. The underlying portfolios are a 50/50 split between Alphabeta fund partners - AB4 portfolio and Morningstar - Moderate passive portfolio.
The overall charges, including IFA fees are 1.395%
I can't help feeling that I could invest directly into a similar portfolio in an ISA without an IFA.
Any views and advice would be welcome

[Chrysalis]

Yes you could definitely do the same, cheaper, in an ISA.

[hiriskpaul]

1.395% is far too much for what you are getting. I just don't buy it that these offshore bonds protects you from care fees either.

For comparison, an investment into a Vanguard Lifestrategy 60 fund (60% global shares, 40% bonds) costs just 0.22% with a low fee provider such as iWeb. You could transfer your ISAs to iWeb and invest the remaining funds into VLS 60 with iWeb outside an ISA, then transfer £20k each year into the ISA. The dividend yield of the VLS 60 is about 1.4%, so about £4,900 on the £350k not yet in an ISA. Spread between the 2 of you that would mean just £450 each of taxable income and it is unlikely you would need to pay capital gains tax as you fed your ISAs each year.

By using ISAs instead of an offshore bond you would still have full access to your money and could give some to your son's if you wanted to in order to mitigate inheritance tax, should that become an issue.

[hiriskpaul]

Just to illustrate why a charge of 1.395% compared with 0.22% matters so much, take an example growth rate of 4% real over 20 years, not an unreasonable forecast for a 60/40 equity/bond investment. After fees that reduces to a growth rate of 3.78% and 2.605% respectively. After 20 years the £500k would then be worth £1,050,131 and £836,258 respectively in today's money. A difference of £213,872, which would pay for a lot of care.