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Are investment choices meeting client objectives?

30/05/2023

Recent research from NextWealth found that when asking advisers what is documented to evidence value to clients, 73% said the performance of the portfolio. Less than 50% said milestones against client goals and objectives. 

The last 12 months have presented a number of challenges for UK investors. We have seen energy prices escalate, with gas prices up 129.4% in the year to March 2023. Interest rates has increased from record lows of sub 1% in 2022 to near 5% in less than a year. On top of this there have been huge reductions in tax free allowances.

In a challenging economic climate, with an increased tax burden, and the introduction of Consumer Duty rules it is important that advisers are working with clients to fully understand their concerns. So how do we look towards different investment options and make sure they stay in touch with client objectives?

Onshore bonds are a great option during challenging periods. They are currently having a resurgence and advisers are turning to the bond as a smart choice for long-term investors who want a low risk, low volatility asset. They present an opportunity for individuals and trusts alike to mitigate tax and help plan for a family’s financial future. 

The LV= Wealth and Wellbeing report provides us with a clear picture of the nation’s financial and mental health. We can track changes in income, outgoings, spending and areas of concern, all of which help provide invaluable insight, not just for our team, but for the financial community. 

In the 12th edition of our Wealth and Wellbeing report we asked our audience the top reason for investing in bonds - 53% of retirees said that it was because they were low risk, while 44% of respondents said it was because they provided good returns. These were the top two reasons given and therefore when a proportion of UK adults (43%) have described their financial situation as “struggling”, we can see why bonds would be a good choice. So, have bonds been forgotten in a climate where we might be looking for low risk and low volatility? And how do onshore bonds sit within a client’s portfolio to help them meet their objectives?

Let’s look at the example of Angus and Lara. Angus (68) and Lara (64) have recently retired. They are financially secure, with untouched pension and ISA investments, plus sufficient pension income to meet their needs. However, due to recent changes in taxation and an increase of interest rates, they have made a decision to sell the two rental properties they own, raising £500,000. They do not expect they will need the £500,000 themselves. Instead, they largely intend to use the money to benefit their children and grandchildren, but as and when it’s needed. So, their main objectives are:

  • To help out their children and grandchildren
  • To make gifts for effective tax planning
  • To begin to start making plans for their estate

They are discussing with their financial adviser whether an onshore bond might be the right product to meet their objectives. The adviser has discussed this at great length with them and highlighted the features that they feel will be of most benefit to help them meet their objectives:

Objective = to help out the children and grandchildren.

Take regular withdrawals – through the bond they can withdraw up to 5% of the original investment each year without an immediate tax liability or need for a tax return. This helps meet their objective and allows them to take out money when required to help out their children and grandchildren.

Objective = make gifts for effective tax planning.

Make larger gifts – if they wish to make large gifts at any point, they can assign all of part of the bond to another family member. This gift will not require the bond to be encashed or cause any immediate tax liability. This helps them meet their objective of starting to make gifts for effective tax planning. 

Objective = start to make plans for their estate.

Assigning part of the bond to another individual – Angus and Lara are both in good health and are just starting their retirement journey, so are currently not too concerned about inheritance tax planning. Later on, this will be more of a focus. At that point, they will have the option of gifting (assigning) the bond either into trust or directly to a family member, so as to remove it from their estates. This helps them meet their objective of starting to make plans for their estate. 

Although Angus and Lara have been well prepared for their retirement, life is always moving and circumstances change. By discussing their new plans with their adviser, they have been able to establish some new objectives which can now be measured with the onshore bond. The adviser is then in a better position to monitor their new objectives with them and ascertain the difference the product is making to their lives and wellbeing. As they get older, they might wish to discuss putting the bond within a trust and consider how the assignation (gifting) we discussed earlier might assist them in their inheritance planning.

With consumer duty rules due imminently it is so important that advisers are able to demonstrate value and due care to their clients. Of course, like in the case of Angus and Lara, their goals and objectives will change over time and therefore the regular reviewing and monitoring of these goals is so important. See our Consumer Duty Hub for all the support you may need. 

Tax and inheritance mitigation is one of the most anxious areas of financial planning for clients. The ability to meet them on this journey and provide a solution that offers low volatility while still achieving growth over the medium to long term is important. 

In a climate of reduced allowances, increased tax rates and concerns of volatility, the onshore bond provides a haven for individuals and trusts alike. 

Find out more about the LV= Smoothed Bond to see how clients can experience a calmer investment journey through our unique smoothing mechanism. Offering access to our market leading with profits whole-of-life investment bond.