The title is synonymous with making a mess of something and that is what many retirees will be doing if they expect insurance bonds to provide them with the flexibility for pension planning that they need. This article explains the advantages of platforms over insurance bonds within a pension.
The problem is that many international financial advisers have limited licences and limited access to investment products that restricts them to selling insurance bonds as an investment product. Insurance bonds, outside of a pension, may offer useful tax deferral and tax planning opportunities in SOME countries for the well-off. Please note that there are many countries that do not recognise the tax benefits of some insurance bonds.
However, in a pension, insurance bonds make as much sense as wearing two pairs of underpants. One pair will suffice and two will restrict your movements- the same issue with insurance bonds. Insurance bonds in a pension DO NOT offer any additional tax advantages- only adding higher costs to the investor.
Platform vs Insurance Bonds
A platform is most likely to be offered by advisers with investment licences. Many low cost funds can be held on a platform and the investor and the client can plan the decumulation phase ( taking the pension income ) and the investment strategy fully.
For example, a client may have a large number of funds on a platform and wish to encash part of one fund to take the profit. The client may also wish to take the income generated from the funds and leave all the other capital intact- Not possible with insurance bonds.
Insurance bonds are segmented , like a honeycomb, often into between 10 to 1,000 segments. Each segment looks the same as the others and so a bit of every fund and income is in each segment.
To make the point, look at this bar chart, and imagine it is a box of coloured crayons. You want to take only some of the blue crayons out of the box-
The Crayon Box
Platform– You look into the box and carefully choose and take out the 4 blue crayons you need- easy
Insurance Bond– Here we come to the “Goulash”. The box has been shaken and you are only allowed to reach in to take 4 crayons in the order they come out- No choice and no looking first ( You will get a mix of colours-even the ones you wanted to leave in the box) , but you will get 6 crayons- so that is okay is it?
Surely, the lack of ability to take a retirement income in the mix that you and your adviser want- to take account of the investment climate and future plans- makes an insurance bond a less than ideal box to hold your investments during retirement.
Not only are platforms not able to be sold by advisers without an investment licence, most platforms do not pay commission to advisers and most deal with clean regulated share classes (Please note: not all!)
Insurance licences are easy to obtain (requiring little in the way of investment experience, qualifications and regulatory monitoring) and they pay 7 to 8% undisclosed commissions to the adviser- thus locking the client into the investment wrapper for 5 to 8 years.
Given the above, would YOU chose to use an insurance bond for your pension?
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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