UK Investment Bonds 2008

Published by: Datamonitor

Published: Oct. 24, 2008 - 10 Pages

Table of Contents

Overview

Catalyst

Summary

Executive Summary

Wrap platforms are an important technology for overcoming the challenges of investment bonds

There has been strong growth in guaranteed income and growth bonds

The investment bond market is facing a number of challenges

There remains life in the investment bond

Table of Contents

Table of figures

Table of tables

SPECIAL FEATURE: THE ROLE OF WRAP PLATFORMS IN THE DISTRIBUTION OF BONDS

Wrap technology is the way forward for promoting and selling investment bonds

Wrap platforms have evolved from the funds supermarkets of the late 1990s

Datamonitor developed a definition for a 'pure wrap' that has become a market standard

Wrap accounts are set for a period of expansion and then consolidation

There remains a challenge for IFAs to improve their take-up of wrap platforms

The flexibility of bonds makes them an attractive investment to a wide range of customers

There are eight key areas where a wrap platform will help overcome challenges

The RDR is altering the distribution landscape, with mass affluent and high net worth investors set to benefit from a higher level of advice

New FSA guidelines require investment bonds to come with full and focused financial advice

The complexity around bonds can make it difficult to determine the optimum investment portfolio

Wrap platforms accommodate the FSA's move toward a more transparent model concerning charges

Innovative example: Clerical Medical has worked with IFAs to help them move toward a technologically based business model

TCF is being integrated into wrap platforms to ensure customers receive full product information

The tax complexity of bonds and income drawing options are making an online service attractive to IFAs

Innovative example: Clerical Medical has devised online calculators to help IFA clients with investment bond tax calculations

Individual investor circumstances need to be considered and wrap platforms make 'switching' easy

Wrap platforms are an efficient means for administering the whole client portfolio

Innovative product and marketing example from Australia: BT Financial Group operates a 'baby wrap', providing an insightful case study via its website

Innovative products can be brought quickly to market via a wrap platform

Innovative example: Zurich forms a partnership with wrap platform Ascentric to offer its Sterling investment bond online to IFAs

IFAs are encouraged to adopt a more efficient business model

Much of the work for saving the bond has been done; now strategy needs to turn to technology

MARKET CONTEXT

Introduction to the investment bond product

An investment bond is a life assurance policy primarily structured as an investment

A unit-linked bond is a single premium contract that offers flexibility and transparency with the possibility of better returns

High income bonds offer high income payouts to investors but carry the risk of loss of capital

Distribution bonds generate income based on the underlying assets of the distribution fund

With-profit bonds offer low volatility to investors

The 'guaranteed bond' category is a new ABI classification

The guaranteed equity bond is a unit-linked bond with some guarantee of capital return

Guaranteed income bonds and guaranteed growth bonds both secure the holder's capital

Various products have evolved from traditional with-profits insurance bonds to compete with the unit trust market

Unit-linked bonds remain the mainstay but investors are moving toward guaranteed and distribution bonds

Life insurance companies sell investment bonds and a favorable tax structure has been key to this core part of their business

Under the old regime the tax structure gave a clearer advantage to investment bonds

In the 2008 Budget, the chancellor announced dramatic changes to capital gains tax

The tax treatment of investment bonds has not changed

Investment bonds are taxed within the income tax regime rather than as capital gains

The investment bond market continues to grow with gross single premium new business representing over one third of the total UK fund market in 2007

The investment bond market has grown on a par with the mutual fund market

Investment bonds have increased in popularity during 2007

Unit-linked bonds dominate the single premium life market, although there has been keen growth in income and growth bonds

The unit-linked market has underpinned growth in the single premium bond market

Guaranteed equity bonds are a risky investment and IFAs have shied away from them

With-profits bonds have probably had their day as a market leader

Guaranteed income and growth bonds are proving to be popular new investment products

Guaranteed income bonds pay a regular income while guaranteed growth bonds guarantee capital appreciation

Distribution bonds have also increased in popularity between 2003-2007

Going forward, the appropriateness of a bond for any individual investor is more complex to determine, but it remains a viable investment product

An initial fear of disaster in the bond world has not materialized, but providers have put a lot of work into achieving this outcome

The best investment product depends on individual circumstances but there are three key facts which keep a bond broadly attractive as an investment

Only 5% of the population pays CGT

The majority of bond holders are basic rate tax payers at the time of encashment and the changes to CGT make bonds even more attractive for these investors

An investment bond is a flexible product that can be adapted as an individual's circumstance change

There are clear circumstances (both general and specific) where a bond is an advantageous investment

Investors in mutual funds pay tax on gains and on income which gives bonds an advantage

A higher rate tax payer can receive income from a bond and defer tax

Bonds can be assigned to avoid an income tax charge

A bond is an efficient investment for inheritance tax planning

An investment bond can help a retired person avoid the age allowance trap

Investment bonds are not included as means for individuals needing long term care

It is not all favorable news for investment bonds

Providers have made some product, service and technological innovations to help IFAs and clients understand the complexities of investment choices

Clerical Medical is forging ahead in the innovation stakes

Clerical Medical has devised online calculators to help IFA clients determine the appropriateness of bonds

Clerical Medical has channeled a lot of resources into encouraging IFAs to use its technology platform

Legal and General has broker-consultants who work closely with IFAs

Life companies are tending to offer a full range of bond products while emphasizing their flexibility, especially the ability to switch without incurring a tax charge

Greater focus on the offshore bond market will also help providers bridge any gap

SECTOR ISSUES

Economic turmoil is the most challenging issue faced by the market

The regulatory framework is placing demands on providers and advisors

The TCF initiative aims to create a more efficient and effective market

TCF will help investors be better informed about the risks associated with investment bonds

High commissions and poor quality of advice on the part of advisors are concerns in the investment bond market

When investments turn sour blame is assigned to commission-induced product bias and quality of advice but should it be a case of 'let the buyer beware'?

There is a misperception in the market that bonds are a no- or low-risk investment so it is important that initiatives such as TCF and the RDR are implemented to protect buyers and sellers

Poor quality service does exist

Innovative example: Novia adds TCF management tools to wrap platform

The RDR aims to increase consumer access to financial products and services through offering a dual system of financial sales and advice

Innovative example: Fidelity FundsNetwork introduces 'RDR proof' investment solutions which include bonds

Concerns about providers in the investment bond market include poor returns and high exit fees

Poor returns and high exit fees in a underperforming market leave investors in an impossible situation

Concerns about product structure have led to innovations to offer greater flexibility and transparency

Changes to taxation have significantly impacted on the investment bond market

Product and technological innovation are important issues in the UK bond market

DISTRIBUTION CHANNELS FOR INVESTMENT BONDS

IFAs dominate the distribution of life products in the UK

IFAs dominate the provision of investment products and financial advice

The IFA channel accounts for over 70% of total life and pensions sales in the UK

IFAs are well-established in the market but many are shifting their focus upmarket

Some differences have emerged in the distribution of unit-linked and non-unit-linked bonds

Unit-linked bond distribution has moved away from IFA/whole of market advisors toward single tie advisors

Non-unit-linked bond distribution by IFAs has grown rapidly, making up for the fall-off in unit linked bonds

Wrap technology is the way forward for IFAs promoting and selling life products

APPENDIX

The changes to CGT which took effect in April 2008

The changes to CGT are more far-reaching than their intended target

The tax structure of investment bonds

A tax charge can arise whenever a ""chargeable event"" occurred

Top slicing relief

An investment bond carries a 5% tax deferred withdrawal allowance

Definitions

Asset manager / Asset management company

Bank

Bid offer spread

Collective Investment Scheme

Exchange-Traded Fund

Fund of funds

Fund supermarket

Hedge fund

MiFID

Non-retail market

Retail market

Structured products

UCITS

Telesales

Other

Methodology

Bibliography

Further reading

Ask the analyst

Datamonitor consulting

Disclaimer

List of Tables

Table 1: Total retail investment fund market (investment bonds and mutual funds), £ million (gross), 2003-07

Table 2: Forecast single premium life market, £ million APE, 2008-12

Table 3: Total single premium life market, £ million APE, 2003-07

Table 4: Clerical Medical online calculator for IFAs

Table 5: Use of use offshore bonds by IFA clients

Table 6: The TCF Centre is an innovative portal to help monitor TCF outcomes

Table 7: Fidelity FundsNetwork 'RDR proof' investment solutions

Table 8: Unit linked bond distribution, £ million APE, 2003-07

Table 9: Non-unit-linked bond distribution, £ million APE, 2003-07

List of Figures

Figure 1: The future of the retail distribution of investment products has a simple landscape

Figure 2: Wrap platform process structure

Figure 3: BT offers a entry level 'baby wrap' to investors

Figure 4: Products that offer guarantees and smoothing compete with the unit-linked market

Figure 5: Tax structure of an investment bond

Figure 6: Total retail investment fund market (investment bonds and mutual funds), £ million (gross), 2003-07

Figure 7: Forecast single premium life market, £ million APE, 2008-12

Figure 8: Total single premium life market, £ million APE, 2003-07

Figure 9: Financial Advisors dominate life and pensions new business

Figure 10: Unit linked bond distribution, £ million APE, 2003-07

Figure 11: Non-unit-linked bond distribution, £ million APE, 2003-07

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Abstract

• Special feature examines wrap platforms in the distribution of bonds, focusing on how this technology can enable a better functioning market.
• Insight into the product and technological innovations that are taking place in the market to ensure the continued viability of the investment bond.
• Reviews the economic turmoil, tax and regulatory changes that are challenging the investment bond market.
• Details of current gross single new premium investment bond business and forecasts the market to 2012.

• Unique insight into the investment bond market, particularly the tax and regulatory changes that are driving innovations in the market.
• Provides details of current gross single new premium investment bond business and forecasts the market to 2012.
• Insight into the product and technological developments that are taking place in the investment bond market.

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