UK Investment Bonds 2008

The report provides analysis of the UK investment bond market. Insight is given into market size and growth, including Datamonitor forecasts to 2012. There is analysis of the impact of changes to capital gains tax on the viability of the bond, and the key sector issues and distribution channels are also reviewed.

Report Highlights
Wrap technology is the way forward for promoting and selling investment bonds, and there are eight key areas where a wrap platform overcomes the challenges of investment bonds. these challenges arise from the flexibility of the bond product.

Despite the possible negative impact of changes to CGT, 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.

Economic turmoil is the most challenging issue facing the market, although the regulatory framework is placing demands on providers and advisors and changes to taxation have significantly impacted on the bond market.
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Overview 1
Catalyst 1
Summary 1
Executive Summary 2
Wrap platforms are an important technology for overcoming the challenges of investment bonds 2
There has been strong growth in guaranteed income and growth bonds 2
The investment bond market is facing a number of challenges 2
There remains life in the investment bond 3
Table of Contents 4
Table of figures 5
Table of tables 6
SPECIAL FEATURE: THE ROLE OF WRAP PLATFORMS IN THE DISTRIBUTION OF BONDS 7
Wrap technology is the way forward for promoting and selling investment bonds 7
Wrap platforms have evolved from the funds supermarkets of the late 1990s 7
Datamonitor developed a definition for a 'pure wrap' that has become a market standard 7
Wrap accounts are set for a period of expansion and then consolidation 8
There remains a challenge for IFAs to improve their take-up of wrap platforms 8
The flexibility of bonds makes them an attractive investment to a wide range of customers 9
There are eight key areas where a wrap platform will help overcome challenges 9
The RDR is altering the distribution landscape, with mass affluent and high net worth investors set to benefit from a higher level of advice 10
New FSA guidelines require investment bonds to come with full and focused financial advice 10
The complexity around bonds can make it difficult to determine the optimum investment portfolio 11
Wrap platforms accommodate the FSA's move toward a more transparent model concerning charges 12
Innovative example: Clerical Medical has worked with IFAs to help them move toward a technologically based business model 13
TCF is being integrated into wrap platforms to ensure customers receive full product information 13
The tax complexity of bonds and income drawing options are making an online service attractive to IFAs 14
Innovative example: Clerical Medical has devised online calculators to help IFA clients with investment bond tax calculations 14
Individual investor circumstances need to be considered and wrap platforms make 'switching' easy 14
Wrap platforms are an efficient means for administering the whole client portfolio 15
Innovative product and marketing example from Australia: BT Financial Group operates a 'baby wrap', providing an insightful case study via its website 15
Innovative products can be brought quickly to market via a wrap platform 17
Innovative example: Zurich forms a partnership with wrap platform Ascentric to offer its Sterling investment bond online to IFAs 17
IFAs are encouraged to adopt a more efficient business model 18
Much of the work for saving the bond has been done; now strategy needs to turn to technology 18
MARKET CONTEXT 19
Introduction to the investment bond product 19
An investment bond is a life assurance policy primarily structured as an investment 19
A unit-linked bond is a single premium contract that offers flexibility and transparency with the possibility of better returns 19
High income bonds offer high income payouts to investors but carry the risk of loss of capital 20
Distribution bonds generate income based on the underlying assets of the distribution fund 20
With-profit bonds offer low volatility to investors 21
The 'guaranteed bond' category is a new ABI classification 21
The guaranteed equity bond is a unit-linked bond with some guarantee of capital return 21
Guaranteed income bonds and guaranteed growth bonds both secure the holder's capital 21
Various products have evolved from traditional with-profits insurance bonds to compete with the unit trust market 22
Unit-linked bonds remain the mainstay but investors are moving toward guaranteed and distribution bonds 23
Life insurance companies sell investment bonds and a favorable tax structure has been key to this core part of their business 24
Under the old regime the tax structure gave a clearer advantage to investment bonds 24
In the 2008 Budget, the chancellor announced dramatic changes to capital gains tax 24
The tax treatment of investment bonds has not changed 25
Investment bonds are taxed within the income tax regime rather than as capital gains 25
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 26
The investment bond market has grown on a par with the mutual fund market 26
Investment bonds have increased in popularity during 2007 28
Unit-linked bonds dominate the single premium life market, although there has been keen growth in income and growth bonds 29
The unit-linked market has underpinned growth in the single premium bond market 29
Guaranteed equity bonds are a risky investment and IFAs have shied away from them 32
With-profits bonds have probably had their day as a market leader 33
Guaranteed income and growth bonds are proving to be popular new investment products 33
Guaranteed income bonds pay a regular income while guaranteed growth bonds guarantee capital appreciation 33
Distribution bonds have also increased in popularity between 2003-2007 34
Going forward, the appropriateness of a bond for any individual investor is more complex to determine, but it remains a viable investment product 35
An initial fear of disaster in the bond world has not materialized, but providers have put a lot of work into achieving this outcome 35
The best investment product depends on individual circumstances but there are three key facts which keep a bond broadly attractive as an investment 35
Only 5% of the population pays CGT 36
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 36
An investment bond is a flexible product that can be adapted as an individual's circumstance change 37
There are clear circumstances (both general and specific) where a bond is an advantageous investment 37
Investors in mutual funds pay tax on gains and on income which gives bonds an advantage 38
A higher rate tax payer can receive income from a bond and defer tax 38
Bonds can be assigned to avoid an income tax charge 38
A bond is an efficient investment for inheritance tax planning 39
An investment bond can help a retired person avoid the age allowance trap 39
Investment bonds are not included as means for individuals needing long term care 39
It is not all favorable news for investment bonds 39
Providers have made some product, service and technological innovations to help IFAs and clients understand the complexities of investment choices 40
Clerical Medical is forging ahead in the innovation stakes 40
Clerical Medical has devised online calculators to help IFA clients determine the appropriateness of bonds 40
Clerical Medical has channeled a lot of resources into encouraging IFAs to use its technology platform 42
Legal and General has broker-consultants who work closely with IFAs 42
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 42
Greater focus on the offshore bond market will also help providers bridge any gap 43
SECTOR ISSUES 44
Economic turmoil is the most challenging issue faced by the market 44
The regulatory framework is placing demands on providers and advisors 45
The TCF initiative aims to create a more efficient and effective market 45
TCF will help investors be better informed about the risks associated with investment bonds 45
High commissions and poor quality of advice on the part of advisors are concerns in the investment bond market 46
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'? 46
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 46
Poor quality service does exist 47
Innovative example: Novia adds TCF management tools to wrap platform 47
The RDR aims to increase consumer access to financial products and services through offering a dual system of financial sales and advice 49
Innovative example: Fidelity FundsNetwork introduces 'RDR proof' investment solutions which include bonds 50
Concerns about providers in the investment bond market include poor returns and high exit fees 51
Poor returns and high exit fees in a underperforming market leave investors in an impossible situation 51
Concerns about product structure have led to innovations to offer greater flexibility and transparency 52
Changes to taxation have significantly impacted on the investment bond market 52
Product and technological innovation are important issues in the UK bond market 53
DISTRIBUTION CHANNELS FOR INVESTMENT BONDS 54
IFAs dominate the distribution of life products in the UK 54
IFAs dominate the provision of investment products and financial advice 54
The IFA channel accounts for over 70% of total life and pensions sales in the UK 55
IFAs are well-established in the market but many are shifting their focus upmarket 55
Some differences have emerged in the distribution of unit-linked and non-unit-linked bonds 55
Unit-linked bond distribution has moved away from IFA/whole of market advisors toward single tie advisors 55
Non-unit-linked bond distribution by IFAs has grown rapidly, making up for the fall-off in unit linked bonds 57
Wrap technology is the way forward for IFAs promoting and selling life products 58
APPENDIX 59
The changes to CGT which took effect in April 2008 59
The changes to CGT are more far-reaching than their intended target 59
The tax structure of investment bonds 59
A tax charge can arise whenever a ""chargeable event"" occurred 60
Top slicing relief 60
An investment bond carries a 5% tax deferred withdrawal allowance 61
Definitions 61
Asset manager / Asset management company 61
Bank 61
Bid offer spread 61
Collective Investment Scheme 61
Exchange-Traded Fund 62
Fund of funds 62
Fund supermarket 62
Hedge fund 62
MiFID 62
Non-retail market 62
Retail market 62
Structured products 63
UCITS 63
Telesales 63
Other 63
Methodology 63
Bibliography 63
Further reading 64
Ask the analyst 64
Datamonitor consulting 64
Disclaimer 64
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Table 1: Total retail investment fund market (investment bonds and mutual funds), £ million (gross), 2003-07 27
Table 2: Forecast single premium life market, £ million APE, 2008-12 29
Table 3: Total single premium life market, £ million APE, 2003-07 31
Table 4: Clerical Medical online calculator for IFAs 41
Table 5: Use of use offshore bonds by IFA clients 43
Table 6: The TCF Centre is an innovative portal to help monitor TCF outcomes 48
Table 7: Fidelity FundsNetwork 'RDR proof' investment solutions 51
Table 8: Unit linked bond distribution, £ million APE, 2003-07 56
Table 9: Non-unit-linked bond distribution, £ million APE, 2003-07 58
Figure 1: The future of the retail distribution of investment products has a simple landscape 11
Figure 2: Wrap platform process structure 12
Figure 3: BT offers a entry level 'baby wrap' to investors 16
Figure 4: Products that offer guarantees and smoothing compete with the unit-linked market 23
Figure 5: Tax structure of an investment bond 26
Figure 6: Total retail investment fund market (investment bonds and mutual funds), £ million (gross), 2003-07 27
Figure 7: Forecast single premium life market, £ million APE, 2008-12 28
Figure 8: Total single premium life market, £ million APE, 2003-07 30
Figure 9: Financial Advisors dominate life and pensions new business 54
Figure 10: Unit linked bond distribution, £ million APE, 2003-07 56
Figure 11: Non-unit-linked bond distribution, £ million APE, 2003-07 57
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