With changes to pensions, tax allowances and estate planning continuing to shape advisers’ conversations with clients, interest in onshore investment bonds is growing. Mark Lambert, Head of Onshore Bond Distribution at Chesnara Life (UK) Ltd, talks to IFA Magazine about the opportunities they offer, how advisers are using them within wider financial planning strategies, and some of the common misconceptions surrounding the tax wrapper.
IFA: Onshore investment bonds are very much a focus of interest with advisers. Why?
Mark: It’s vitally important to stress in any conversations about onshore investment bonds that suitability will depend on the individual client’s circumstances and financial planning objectives.
The impending inclusion of unused defined contribution pension funds in estates from April 2027 has been a major influence recently. But the growing interest in onshore investment bonds has been building for some time, simply because they address many of the challenges clients currently face.
Successive reductions in dividend allowances, capital gains tax exemptions and the changes to pension lifetime planning opportunities have highlighted the need for alternative tax planning solutions. in addition, the long-term trend of an ageing population is creating greater demand for products that can support estate planning, intergenerational wealth transfer and flexible retirement income strategies.
Advisers are increasingly looking at onshore bonds as a tax wrapper rather than simply an investment product. Onshore bonds are a product that remain relevant throughout an investment client’s lifetime, delivering tax efficient investment, income and intergenerational planning solutions.
The ability to defer tax, manage the timing of chargeable events and potentially benefit from top slicing relief makes them particularly relevant for clients whose tax position may change over time.
They provide practical advantages when used alongside trusts and gifting strategies.
Importantly, we are seeing advisers becoming more sophisticated in their use of tax wrappers generally. As a result, onshore bonds are increasingly recognised for the flexibility they can offer across a broad range of financial planning objectives rather than being viewed through a purely investment lens.
IFA: How are advisers using onshore investment bonds to meet their clients’ financial planning needs?
Mark: Their flexibility enables advisers to use onshore investment bonds in a variety of ways, depending on a client’s objectives. For clients seeking long-term growth, bonds provide a tax-efficient environment for investments to be managed in without creating annual capital gains tax reporting obligations.
For those requiring supplementary income, the ability to take regular withdrawals while controlling the timing of taxation can be particularly attractive.
Advisers whose clients use the 5% tax deferred allowance for regular withdrawals are also taking the opportunity to see whether running an income solution for the associated investment strategy will make sense for these clients, appreciating that cash dividends received into an onshore bond are tax free within the wrapper.
Estate planning remains one of the most significant applications for onshore bonds, and this will only increase with unused DC pensions coming into the mix next year and frozen allowances remaining until at least 2031.
Onshore bonds can be placed into trust, assigned in segments and used alongside gifting strategies, helping advisers create tailored solutions for clients looking to pass wealth to future generations whilst retaining varying degrees of control and access.
Advisers are also increasingly using onshore bonds for clients whose tax rates may reduce in retirement. Deferring a potential tax charge until a future point when income levels are lower delivers valuable planning opportunities as can assigning to a partner or spouse in a lower tax rate.
This strategy can also apply when assigning to adult children to enable them to receive a lump sum from a parent, for example, where the tax on the gain would be assessed on the child and, therefore, if applicable, utilising their lower tax rate band. In addition, bonds are proving useful for trustees, family wealth planning and, in some instances, for limited companies looking to invest surplus capital in a tax-efficient manner.
IFA: What are the myths or misconceptions about onshore investment bonds?
Mark: The biggest misconceptions are that onshore investment bonds are complicated or only suitable for wealthy clients engaged in sophisticated tax planning.
In reality, they can be appropriate for a wide range of investors when used as part of a well-structured financial plan. Clients benefit from a lack of ongoing personal taxation administration all the time they do not exceed the 5% tax deferred withdrawal allowance during the first 20 years of a bond’s life.
A point to be aware of is that many people misunderstand the 5% withdrawal facility. Some assume withdrawals are tax-free. In fact, they are generally tax deferred, meaning the taxation position is assessed when a chargeable event occurs.
A common myth is that bonds are poor investments. That ignores the fact that a bond is not an investment in itself – it is a tax wrapper. The performance delivered depends on the underlying assets selected, which means outcomes are driven by investment strategy rather than the wrapper.
With open architecture onshore bonds, advisers can in the majority of cases utilise the same investment funds that they would in the client’s Pensions, ISAs and General Investment Accounts.
The perception that onshore bonds are inflexible compared with other wrappers is just not correct. Modern onshore bonds offer extensive fund choice, portfolio management options and sophisticated estate planning capabilities.
When used appropriately, they can be among the most versatile planning tools available to advisers and their clients.
IFA: How flexible are onshore investment bonds when it comes to the choice and range of assets to invest in, and what types of assets can’t be invested in within an onshore investment wrapper?
Mark: Modern onshore investment bonds offer a high degree of investment flexibility. Advisers can typically access thousands of funds from numerous fund managers, covering UK and international equities, fixed-interest securities, multi-asset portfolios, property funds, ETFs and discretionary fund management solutions.
This breadth of choice enables portfolios to be aligned with a wide variety of risk profiles, investment objectives and timescales.
People who still view investment bonds as offering only a limited menu of insurance company funds not aware of the current reality. The reality is that many modern bond providers operate open-architecture propositions, giving advisers access to extensive third-party investment opportunities.
There are restrictions. Assets that could give rise to unauthorised tax consequences or valuation difficulties are generally not permitted.
Direct residential property, tangible movable property such as fine wine, classic cars, art and certain unlisted or highly specialist investments would typically fall outside what can be held directly within an onshore bond structure. Advisers should always check asset eligibility before investing.
What sets out Chesnara Life’s proposition as different from its competitors?
Mark: Chesnara Life’s proposition is built around delivering a specialist, adviser-focused onshore bond solution rather than attempting to be all things to all people. We believe advisers value expertise, accessibility and consistency of service, particularly in a market where technical support and tax planning capability are becoming more important.
Our onshore investment bond combines a transparent charging structure with a genuinely open-architecture approach, providing access to thousands of funds from a broad range of investment managers. This enables advisers to construct portfolios that suit individual client objectives rather than being constrained by a limited investment universe.
We support advisers with dedicated business development, technical guidance and practical estate planning guidance, helping them make the most of the opportunity’s investment bonds can create. The proposition is available both directly and through selected platform partners, giving advisers flexibility in how they choose to do business.
Our focus is simple – combining investment flexibility, tax-planning functionality and personalised support to help advisers deliver better outcomes for their clients.
About Chesnara Life (UK) Ltd
Chesnara Life (UK) Ltd, formerly HSBC Life (UK) Limited, is a UK subsidiary of Chesnara plc. Chesnara Life offers its open architecture Onshore Investment Bond as a stand-alone offering or through a range of third-party investment platform partners. The Chesnara Life Business Development Team supports all versions of our Bond. The Chesnara Life Onshore Investment Bond provides individual investors with access to over 4,800 funds (Investment Trusts, Open Ended Investment Companies, Unit Trusts, and Exchange Traded Funds) from more than 200 Fund Managers. Chesnaralife.co.uk
Chesnara Life (UK) Ltd is authorised by the Prudential Regulation Authority (“PRA) and regulated by the Financial Conduct Authority (“FCA) and the Prudential Regulation Authority (“PRA”). Our Financial Services Register number is 133435 and our registered office is at: 2nd floor, 33-34 Winckley Square, Preston, Lancashire, PR1 3JJ, United Kingdom. Registered in England number 88695.