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There is an extensive range of funds available, including: - Managed, including Cautious Managed, Balanced Managed, Stockmarket Managed and Distribution funds. These generally invest in a balanced portfolio of other funds. The main investments are generally equities, but managed funds also have significant holdings of fixed-interest securities, property and some cash deposits. They offer the opportunity to benefit from a well-diversified portfolio, where the insurance company may make some adjustments to its asset allocation according to the prevailing market conditions.
- UK equity funds. UK equities have performed very well over the long term, although there have been many periods of short-term fluctuation. UK equities have a number of advantages, including:
• The UK stock market is one of the largest in the world; it is well regulated and there is a well-developed culture of shareholder value.
• UK equities provide generally higher yields than are available from most major markets.
• Most major UK companies are global businesses, with a substantial international exposure.
- International Funds. International equities have also performed very well over the long term, although there have been many periods of short-term fluctuation. International equities have a number of advantages, including:
• Globally spread investments should be less volatile than purely UK portfolios. The economies of the world are often at different stages in their investment cycles. By investing in different markets, you can smooth out the overall volatility of your investments.
• Many of the world's most well known companies are located in other countries; by confining investments to the UK, you could be missing valuable opportunities. In particular, the UK market has little or no exposure to certain types of businesses, such as automobile manufacturing.
• In general, there have been some economies that have grown consistently faster than the UK.
- Gilt and Fixed-interest Funds. Gilt and fixed-interest funds invest in government and commercial securities that pay a fixed return. They generally provide a stable income that is reinvested in the fund to generate growth. Fixed-interest funds rise in value when interest rates fall and are vulnerable when interest rates rise. In general, fixed-interest funds are less volatile than equity funds, but they have tended to provide a lower rate of long-term growth.
- Property funds. One of the few ways to have a holding in a portfolio of good quality and diversified commercial properties is through a property fund. Property generally provides long-term growth in both income and capital and is less volatile than equities, although in the long term, property has generally lower returns than UK equities.
Unit-Linked single premium bonds have several important advantages to investors. - The bondholder can switch from one fund to another completely free of personal tax.
- The income from the investments in the fund selected is used to increase the value of its units, so that while the investment accumulates, no taxable income would be payable to the bondholder.
- The fund is taxed under the special provisions that apply to life assurance companies. Tax on its income and capital gains is generally at no more than 20%.
- The bondholder would be entitled to withdraw up to 5% of the initial investment for each of the first 20 years. This amount would be completely free of starting, basic and higher rate income tax at the time of withdrawal. Remember that tax is deducted from the underlying funds of the bond.
However, if withdrawals are more than the cumulative total of the annual 5% entitlements in any year, the excess may be liable to higher rate tax (but not starting or basic rate). In calculating any such liability to tax no grossing-up occurs for the tax suffered in the life fund, thereby further reducing any liability to tax. The 5% withdrawals would be free of personal tax at the time they are taken, but the profits could be liable to the higher rate of income tax (but not the starting or basic rate or capital gains tax) when the bond is finally cashed or death occurs.
If the bond is not cashed before death, any higher tax due on the death would be deducted from your taxable estate for inheritance tax purposes, because your estate would include the value of the bond. The potential liability to higher rate tax may be reduced or even eliminated by ‘top slicing' relief. This means that, firstly, the ‘average gain' on the bond is calculated by dividing the gain by the number of complete years the policy has been in force. This ‘average gain' is then added to the bondholder's ‘total income'. Provided their taxable income, including the ‘average gain', is not more than the higher rate threshold in the year the policy is cashed, no tax is payable on the gain. If your taxable income, including the ‘average gain', is more than the higher rate threshold, the tax charge is the difference between the higher rate tax and the basic rate tax on the excess of the ‘average gain' over the higher rate threshold, multiplied by the number of years the policy has been in force. By cashing full policies and taking advantage of top slicing relief it may be possible to take withdrawals well in excess of the 5% allowance without any personal tax liability whatsoever. Chargeable Gains on single premium bonds are added to an individual’s total income for Age Allowance purposes. Age Allowance basically applies when, over the age of 65, an individual's total income is below the threshold figure. The personal age allowance is reduced by £1 for every £2 over the threshold until it comes down to the standard Personal Allowance. Where the personal age allowance is withdrawn, the amount of income over the threshold is subject to an effective tax rate of up to 33%. The married couple's allowance is also withdrawn on the same basis, but is only available if either or both spouses was born before 6 April 1935. The marginal tax rate on the withdrawal of the married couple's allowance is up to an effective 27%.
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