UK Investment Bonds 2010

Introduction

Changes to the Capital Gains Tax regime have queried viability of the investment bond against a backdrop of financial markets emerging out of a recession. Providers are presented with a scenario for success if investors are made aware of clear circumstances where a bond is an advantageous investment.

Scope

*Examines the current shape of the investment bond industry and explore factors that are currently limiting new business.

*Analyzes the use of wrap platforms in the distribution of bonds with focus on how technological developments can enable better business.

*Reviews tax and regulatory changes that are challenging the investment bond market.

*Identifies key competitors and examines their differing strategies in the UK investment bond market.

Highlights

Despite changes to CGT, the investment bond is still a viable part of an investment portfolio. The smoothing factor of with-profits bonds offers the nervous investor the opportunity to even out the volatility of returns from the stock market and other underlying investments.

Economic uncertainty is a key challenge faced by the investment bond market, although a changing regulatory and tax environment continues to bring new challenges to providers, IFAs and retail clients alike.

Reasons to Purchase

*Gain unique insight into the tax and regulatory changes that are driving the investment bond market.

*Understand the investment bond market, the distribution trends and the key technological developments driving new business.

*Access Datamonitor's forecasts for the market and valuable knowledge of how the sector is set to develop to 2014.


Report Highlights

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Overview 1
Catalyst 1
Summary 1
Executive Summary 2
The UK investment bond market declined at a CAGR of 15% over the past five years 2
Providers should make investors aware of clear circumstances in which a bond is an advantageous investment 2
Wrap platforms will shape the distribution of investment bonds 2
Table of Contents 3
Table of figures 4
Table of tables 5
Market Context 6
Introduction to investment bonds 6
Unit-linked bonds offer investors policies with a value that is directly linked to investment performance 7
Clients appreciate the flexibility and transparency of unit-linked bonds 8
With-profits bonds offer a smoothing mechanism, a unique attribute of the product 8
A distribution bond is recognized as a simple product that provides investors with a steady stream of income 9
Guaranteed bonds encompass the guaranteed income, guaranteed growth and guaranteed equity bonds 10
Guaranteed income and guaranteed growth bonds 10
Guaranteed equity bonds 10
Money market bonds are a new category of bonds introduced by the ABI in 2008 11
Sales of investment bonds in 2009 suffered at the hands of fallen stock markets 11
Unit-linked bonds immediately felt the positive effect of stock market rallies in 2009 12
The smoothing factor of with-profits bonds are attracting and calming the nervous investor, to generate healthy sales in 2009 14
With-profits bonds became unpopular after the stock market bubble burst in 2001 14
Guaranteed bonds were popular in 2008 but new business in 2009 declined heavily 15
Distribution bond sales continued to falter in 2009 16
Money market bonds lost favor in 2009, a year after being introduced as a new bond category 16
Investment bonds still remain a viable investment product but discerning the suitability of a bond for any individual will be more complex 17
Investors will still question the role of unit-linked bonds in the future as they lack elements of protection against market volatility 18
A with-profits revival will be seen over the next five years, at the expense of distribution bonds 18
Guaranteed bonds will continue to suffer a decline in sales in 2010 19
Money market bonds will lose their popularity among investors going forward 19
The best investment product depends on individual circumstances but there are three key facts which keep a bond broadly attractive as an investment 20
Only 5% of the population pays CGT 20
The majority of bond holders are basic rate taxpayers at the time of encashment and the changes to CGT make bonds even more attractive for these investors 21
An investment bond is a flexible product that can be adapted as an individual's circumstances change 21
There are clear circumstances in which a bond is an advantageous investment 21
However, investment bonds are not favorable to all scenarios 22
Market Issues 23
Consumers' low risk tolerance is affecting the investment bond market 23
Consumers are risk-averse and prefer safer or guaranteed returns 23
Investment bonds need to attract the less affluent consumer who is unwilling to take any risks with their cash 23
Prevailing economic conditions continue to pose a key challenge to investment bonds 24
Recent changes to taxation will impact the investment bond market 25
Changes to CGT announced in the June 2010 emergency budget may prove beneficial to the investment bond market 25
Under the old regime the tax structure gave a clearer advantage to investment bonds 26
A flat rate of 18% CGT was the prior arrangement that impacted the investment bond market 26
The changes to CGT in April 2008 were more far-reaching than their intended target 27
The tax treatment of investment bonds has not changed 27
Investment bonds are taxed within the income tax regime rather than as capital gains 27
An investment bond carries a 5% tax deferred withdrawal allowance 28
A tax charge can arise whenever a "chargeable event" occurred 28
Technological innovation centering on wraps is helping overcome the challenges of investment bonds 29
There are eight key areas where a wrap platform will help overcome challenges 30
The tax complexity of bonds and income-drawing options will drive growth in distributing investment bonds via wraps 30
Advisors are looking to actively move investment bonds onto wraps over the next 12 months 31
The full advantage of wrap platforms will be realized by placing legacy business such as with-profits bonds on platforms as well as new business 33
Wrap platforms have evolved from the fund supermarkets of the late 1990s 34
The Datamonitor definition of a 'pure wrap' has become a market standard 34
The Retail Distribution Review has inevitably affected the way in which investment bonds are sold and distributed 35
The RDR aims to increase consumer access to financial products and services by offering a tiered system of financial sales and advice 35
The RDR will address concerns about poor returns and high exit fees in the investment bond market 37
Poor returns and high exit fees in an underperforming market leave investors in an impossible situation 37
The Treating Customers Fairly initiative has helped to increase investor understanding about investment bond products and prevents the possibility of mis-selling 37
The TCF initiative aims to create a more efficient and effective market 37
The TCF initiative will filter out poorly structured and poorly performing providers to make investors aware of the risks involved in investment bonds 38
Competitor Dynamics 39
Providers should make investors aware of clear circumstances in which a bond is an advantageous investment 39
Investors in mutual funds pay tax on gains and on income, which gives bonds an advantage 39
A higher rate taxpayer can receive income from a bond and defer tax 40
Bonds can be assigned to avoid an income tax charge 40
A bond is an efficient investment for inheritance tax planning 41
Providers are offering product, service and technological innovations to help IFAs and clients understand the complexities of investment choices 41
Scottish Widows and Clerical Medical, with their full suite of online investment planning tools, are forging ahead in the innovation stakes 41
Scottish Widows and Clerical Medical offer online calculators to help IFA clients determine the appropriateness of bonds 42
The increasing importance of the peripheral features on an investment bond offering will emerge in a post-RDR landscape 43
Lloyds Banking Group wrote the highest investment bond new business in 2009 43
Distribution Dynamics 46
The sale of investment bonds is firmly focused through the IFA channel 46
Fluctuations have taken place in the distribution of unit-linked and non-unit-linked bonds 48
The distribution of unit-linked bonds migrated back to IFAs and whole of market advisors in 2009 after being picked up by non-bancassurance single tie channels in 2007 48
Non-unit-linked bond distribution through IFAs has grown rapidly and sharply 49
Wrap technology will be a key driver in the distribution of life products 51
Appendix 52
Data 52
Product definitions 53
Life-based savings products 53
Life assurance 53
Single premium life 53
With-profits bond 54
Unit-linked bond 54
Income and growth bonds 54
Guaranteed equity bonds 54
Distribution bonds 54
Purchased life annuities 54
Other bonds 54
Annual premium life 54
Endowment policy 55
Whole of life insurance 55
Term assurance 55
Income protection 55
Critical illness 55
Collective life 55
ISAs 55
Personal pensions 56
Stakeholder pensions 56
Group personal pensions 56
Department for Work and Pensions (DWP) rebate 56
Employer-sponsored stakeholder (ESS) pension 56
Self-invested personal pensions (SIPPs) 56
Free-standing additional voluntary contributions (FSAVCs) 56
ABI definitions of distribution channels 57
Independent financial advisors (IFAs) 57
Direct sales forces 57
Tied agents 57
Multi-tied agents 57
Bancassurance 57
Direct marketing 57
Telesales 57
Other 57
Further reading 58
Ask the analyst 58
Datamonitor consulting 58
Disclaimer 58
List of Tables
Table 1: New business from investment bonds (£m APE), 2005-09 15
Table 2: Forecast of new business from investment bonds (£m APE), 2010f-14f 18
Table 3: To what extent do you agree that you will be actively moving the products below onto wrap platforms in the next 12 months? 32
Table 4: Regarding your existing client base, to what extent are these statements aligned with your strategy for wrap platforms in the next 12 months? 34
Table 5: The top 20 investment bond competitors, new business premiums (£m APE), 2009 45
Table 6: Investment bonds new business segmented by distribution channel (£m APE), 2005-09 47
Table 7: Unit-linked new business premiums segmented by distribution channel (£m APE ), 2005-09 49
Table 8: Non-unit-linked bonds new business segmented by distribution channel (£m APE), 2005-09 50
Table 9: Forecast investment bonds new business segmented by distribution channel (£m APE), 2010-14 52
List of Figures
Figure 1: The investment bond suite consists of five bonds 7
Figure 2: With-profits bonds aim to 'smooth out' the volatility of returns from the stock market 9
Figure 3: Sales of investment bonds declined at a CAGR of 15% between 2005 and 2009 13
Figure 4: The investment bond market will only increase by 10% over the next five years, between 2010 and 2014 17
Figure 5: The tax structure of an investment bond 29
Figure 6: Advisors are likely to conduct more investment bond business through wraps in the next 12 months 31
Figure 7: Advisors are planning to actively re-register their clients onto wraps in the coming 12 months 33
Figure 8: The RDR proposes a three-way split for advice 36
Figure 9: The online calculator for IFAs offered by Clerical Medical/Scottish Widows 42
Figure 10: Lloyds Banking Group was the top investment bond provider in 2009 44
Figure 11: IFAs are the main distribution channel for investment bonds 47
Figure 12: IFAs regained their share of unit-linked bond distribution in 2009 48
Figure 13: IFAs account for most non-unit-linked bond distribution 50
Figure 14: Going forward, investment bonds will still predominantly be distributed by IFAs 52

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