Investment Bonds - UK - January 2009
After two years of positive growth in new investment bond sales, things have taken a turn for the worse in 2008 with both the number of new contracts and value of new premiums declining substantially. Changes in the UK’s capital gains tax regime have been particularly detrimental to the market’s competitive position relative to other asset classes, while the current global economic crisis has certainly not done anything to help matters. There have been a few bright spots for investment bonds, with the with-profits segment of the market actually registering positive sales figures, while sales of bonds offering guarantees have naturally benefited from consumers’ need for certainty and security.
Due to their very specific tax advantages, which for the most part mainly benefit only high net worth individuals, and the fact that they are primarily sold via IFAs, investment bonds appeal to a very narrow target market. In fact, according to consumer research, only a small portion of the population are aware of the product’s existence, while even fewer actually report ownership of a policy. On a brighter note, there is some reason to believe that the rapidly ageing and increasingly affluent UK population could result in an expansion in the potential key market.
This report examines the key issues facing the investment bond market, ranging from demographic and economic influences to the potential impact of changes in the regulatory environment and competing investment products. The Market Size section details changes in each segment of the investment bond market, while the report also identifies the key players and their performance. Finally, consumer research highlights attitudes and behaviour towards long term investing.
Key report themes:
The global economic crisis has damaged investor confidence in virtually all higher-risk asset classes.
A flight to safety has, however, benefited some segments of the investment bond market where capital protection is offered.
The changes in the CGT regime have damaged the competitive position of investment bonds.
With the recent failure of the AIG premium bond resulting in significant investors’ losses, bad press has again damaged the integrity of the market.
The continually evolving regulatory environment, which includes the RDR (Retail Distribution Review) and TCF (‘Treating Customers Fairly’), is likely to change the way investment bonds will be sold in the future.
Wider demographic and economic trends indicate that the potential target market of investment bondholders is likely to expand over the coming years.
Whether the industry is able to take advantage of this, however, will depend on how the UK tax system continues to evolve.
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