SEGREGATING A PORTFOLIOmaximising choice with tax deferral
An often understated benefit of investment bonds is the ability
to defer tax on a portfolio – a tax liability can only arise on
certain events, other than these the policyholders do not have to
worry about including the investment on their tax returns. This
makes a bond simple from a policyholder tax perspective, not only
for individual policyholders but also for trustees.
The use of different tax wrappers can produce different outcomes
for investors and, with increasing awareness and knowledge,
advisers are seeking more variety in the assets that can be held
within each wrapper. For the right client it can be important to
make sure that the widest possible investment choice is available
within a single product.
The lack of any UK or local tax in an international bond can
increase the potential for long-term growth and also allows the
policyholder to use a myriad of investments, as the provider does
not have to account for tax on any income or growth within the bond
itself. The exception to this is where UK property-rich collectives
are held so care needs to be taken with these holdings depending on
the type of collective used and the double tax treaty between the
provider’s jurisdiction and the UK.
The absence of most, if not all, taxes allows gross roll-up, or
near gross roll-up. This can increase the net return and the longer
the investment is held, generally the greater the impact of no tax
drag. This tax efficiency can help increase returns; a £1m
portfolio growing at 5% each year net of charges with no tax would
grow to £1,628,895 after ten years and £2,653,298 after twenty
years. A similar return on a portfolio paying 40% tax on the 5%
growth each year would reduce the potential returns to £1,343,916
and £1,806,111 respectively. As you can see the tax drag on an
investment can be substantial and whilst there could be tax on the
portfolio when growth is realised, with an effective exit strategy
the impact can be managed.
This lack of internal tax for an international bond allows the
provider to use a wide variety of assets; insured life funds,
collective investments, platforms and discretionary portfolios.
Platforms can be an attractive option for those seeking to
utilise a wider range of investments and can reduce the transaction
charges from the bond provider. However the investor will be paying
a platform charge and so this will need to be weighed up against
the potential transaction charges.
For example someone who is not anticipating the need to switch
often may prefer to invest directly under the bond as the
transaction charges may be cheaper than the platform charges. For
those anticipating active and frequent switching, the platform
charge may be a more attractive option.
The use of a discretionary investment manager means that the
adviser and investor can work together to select a suitable manager
to run a portfolio. The investor can then nominate this manager and
they will operate to the agreed mandate and in many cases they will
do so as custodian, taking ownership of the assets under the
bond.
Whether the bond holds collectives, platforms or a discretionary
portfolio, and some bond providers allow a combination of multiples
of all three, the underlying assets are usually cash deposits and
collective investments; for example unit trusts, OEICS and
investment trusts.
Although some other assets are allowed, restrictions arise due
to The Personal Portfolio Bonds (Tax) Regulations 1999 [PPB regs]
which effectively limit the type of assets investment bonds can
use. The assets permissible under these regulations, broadly
include insured life funds, unit trusts and OEICs, approved
investment trusts and cash deposits. Other investments such as some
ETFs are also allowable, but notably direct investments in shares
and corporate bonds are not permissible.
Investing in a wide range of investments, such as direct
investments in equities and corporate bonds, would breach these
rules and incur a 15% annual deemed chargeable gain - irrespective
of how the investment has performed. This can be very expensive for
the investor.
When selecting a discretionary fund manager, advisers and
investors will want to do so based on the investment manager’s
expertise and style. Restricting the investments in which they can
invest could constrain the manager’s options as, unless they run
bespoke collectives, the investment manager will need to find
suitable funds to use.
NEIL JONES
Give your clients a guaranteed income with an on/off switch
Canada Life Limited is authorised by the Prudential Regulation
Authority and regulated by the Financial Conduct Authority and the
Prudential Regulation Authority. Registered in England and Wales
no. 973271. Registered offi ce: Canada Life Place, Potters Bar,
Hertfordshire EN6 5BA. MGM Advantage Life Limited, trading as
Canada Life, is a subsidiary of The Canada Life Group (UK) Limited,
and is authorised by the Prudential Regulation Authority and
regulated by the Financial Conduct Authority and the Prudential
Regulation Authority. Registered in England and Wales no. 8395855.
Registered offi ce: 6th Floor, 110 Cannon Street, London EC4N
6EU.
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As your clients’ priorities change through life, The Retirement
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These funds could take a similar investment approach to the
discretionary manager’s in-house style and for many could be an
acceptable solution as the discretionary manager can select the
asset allocation for the portfolio and the fund manager who they
believe is best suited to those assets. For example some fund
managers may be better at managing North American or Far East
equities than others, and some may be better at managing fixed
interest assets than others. The discretionary manager can utilise
this expertise as required.
What if the investor and adviser want to utilise the
discretionary manager’s own expertise and provide them with true
discretionary powers, not limited by the PPB regulations?
They could do this outside a bond wrapper but would lose access
to the valuable benefit of tax deferral – how could they combine
these requirements?
The PPB regulations state that where non-permissible assets are
used the bond will be treated as a personalised bond if those
assets are ‘selected by, or by a person acting on behalf of, the
holder of the policy or contract or a person connected with
him’.
By removing or distancing the client and their adviser from the
selection of the underlying assets the PPB rules do not apply. The
underlying investments are then only limited by what a life
assurance provider can invest in. The limitations are set by the
provider’s regulator and, if the provider is based on the Isle of
Man or Ireland, will include direct investments in equites, bonds
and so on.
The investment manager can be nominated and appointed with a
broad mandate agreed with the investor, however any ongoing
communications must go through the provider and not direct to the
investor or their adviser. The investor and their adviser must not
be allowed to influence the underlying asset selection and suitable
compliance processes need to be in place to ensure this cannot, and
does not, occur. Whilst this type of investment may not be suitable
for all, it can offer distinct advantages:
• The investment manager can construct a truly bespoke portfolio
designed to meet specific objectives - for example income
generation. This can be valuable where the investment has a
specific purpose and could apply to trustee investments such as
under a discounted gift trust.
• The investment style adopted by the discretionary manager can
be used without being constrained by the style of underlying
collective funds being used allowing the investor to potentially
benefit from the manager’s expertise.
• The charges could be lower than using actively managed
collectives as trading direct holdings could be more cost-effective
than trading and holding funds which will include the costs from
the underlying fund manager.
• The chance of inadvertently holding non-permissible assets is
reduced as the bond allows a wider investment choice.
Due to the compliance process that needs to be in place, this
solution is not available under every international bond from every
provider. Canada Life offers such a solution through the open
architecture products it markets from companies in the Isle of Man
and Ireland – it is known as the Segregated Portfolio Service.
Under these products it is a standard investment option. If the
adviser and investor no longer want to use the service or want to
start using it, then they can switch in and switch out at any time
without the need to surrender the bond.
An investment bond can hold multiple funds, have assets on
multiple platforms and use multiple discretionary managers for
permissible assets, all under the same wrapper. To maintain
clarity, if using the Segregated Portfolio Service, whilst multiple
discretionary managers can be used for multiple mandates, it cannot
be combined with the other investment options such as the use of a
platform or a non-SPS portfolio of funds.
The use of an Irish jurisdiction also offers VAT advantages as
the discretionary manager’s fees should not be chargeable due to
the way in which the Irish Revenue Commissioners treat VAT on the
fees.
A single international bond can use a variety of different
investment solutions under a single account and will be able to
provide an appropriate approach for almost any investor. Coupled
with the distinct tax advantages an investment bond can offer,
products with a comprehensive range of investments available, that
allow flexible exit strategies such as effective segmentation, can
provide a great solution for many investors. It can also add value
to an adviser’s proposition and help establish effective
relationships between client, adviser and investment managers.
We say• Investment manager can construct a truly
bespoke portfolio
• Chance of holding non-permissible assets is reduced
• Investment style adopted by the discretionary manager can be
used without being constrained
For more information, please contact your dedicated account
manager.
[email protected]
www.canadalife.co.uk
Canada Life Limited, registered in England no. 973271.
Registered office: Canada Life Place, Potters Bar, Hertfordshire
EN6 5BA. Telephone: 0345 6060708 Fax: 01707 646088
www.canadalife.co.uk Member of the Association of British Insurers.
Canada Life International Limited, registered in the Isle of Man
no. 33178. Registered offi ce: Canada Life House, Isle of Man
Business Park, Douglas, Isle of Man IM2 2QJ. Tel: +44 (0) 1624
820200 www.canadalifeint.com Canada Life International Assurance
(Ireland) DAC, registered in Ireland no. 440141. Registered office:
Irish Life Centre, Lower Abbey Street, Dublin 1, Ireland.
www.canadalifeinternational.ie Canada Life Limited is authorised by
the Prudential Regulation Authority and regulated by the Financial
Conduct Authority and the Prudential Regulation Authority. Canada
Life International Limited and CLI Institutional Limited are Isle
of Man registered companies authorised and regulated by the Isle of
Man Financial Services Authority. Canada Life International
Assurance (Ireland) DAC is authorised and regulated by the Central
Bank of Ireland.
MAR02833 – 0421R
