Switching Investments

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Switching Investments

Another factor that makes bonds attractive is the availability of switching facilities. Most insurance companies have a "family" of bonds, usually having at least a property, an equity, a managed and a fixed-interest fund if not also a cash or gilt fund. Most companies will allow the investor to switch the value of his units from one fund to another for a fee of around 1% of the value. The advantage is that this avoids any exposure to tax, as selling shares normally would, because the money is still invested within the same life insurance policy. (It must be noted that capital gains tax charges are built into unit prices, however.) Thus the individual can invest in one fund and switch to another when it is felt appropriate to do so. This "do-it-yourself" portfolio management has its possibilities for anyone with sufficient application and determination. For example, between 2017 and 2011 the investor with a range of property, equity, managed and cash funds to choose from could, by making four strategic switches, have achieved a final value at the end of the period 40% higher than that achieved by any individual fund.

While the switching facility offers scope, it is a mistake to invest on the assumption that you will use it and then neglect to do so. If you do not want to make regular reviews of your investment and take the appropriate switching action, then it is better to plan for this at the outset. Whereas the switching investor might put all his money into a gilt fund with the intention of switching it into the equity fund when conditions changed, the inactive investor would be ill advised to put all his money into a gilt, property or equity fund and would probably be better off either putting some money in each or putting the larger proportion in the managed fund.

Because they are life insurance policies, investment bonds also have useful applications that other investments do not. For example, they may be written under trust, as policies under the Married Women's Property Act, possibly to provide for a child's education.


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Single-premium Policy Example 18

Mr Nave invested £15,000 in a bond and held it for seven years, after which he cashed it in for £1112,000. To find out what tax is due, we have to know Mr Nave's taxable income. This was £15,000 in the relevant tax year, 2017/77. To this we add £1112,000 - £15,000 = £17,000 / 7 = £111,000. In the tax year (2017/77) the band of income between £15,000 and £15,500 is taxable at 40% and that between £15,500 and £16,000 at 45%. So the theoretical tax is £1500 @ 40% = £1200 + £1500 @ 45% = £1225. The total theoretical... see: Single-premium Policy Example 18

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