Provide for the best years of your life

The plethora of investment policies on offer today can confuse even the best-informed. Anthony Bailey guides you through the minefield and offers tips about the best buys for taxpayers
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A life insurance policy in its purest form is a way of protecting the dependants of a policyholder against an untimely death. A straight- forward term policy pays out a cash sum if you die within the term - for example, 10 or 20 years. If you die, your dependants get a cash cushion. If you survive the term, you get nothing.

But investment-linked life insurance holds out the prospect of getting something back for your money. And many plans offer relatively little actual insurance. Policies come in various forms. The endowment policy to back a mortgage is probably the most familiar. But there are also stand- alone, unit-linked savings plans and single-premium investment bonds for lump-sum investment that can invest in a wide range of assets. The coupling of investment with insurance is largely historical and in the past there were tax allowances on the premiums. But for the most part, these have long since gone.

"We don't recommend life insurance-based investments products very often," says Tim Cockerill of Whitechurch Securities. "As financial advisers we always look first at unit trusts, investment trusts and PEPs. In most situations, they are most suitable for our clients."

He reckons that the typical unit-linked 10-year life insurance policy simply does not stand up to comparison with unit and investment trusts savings plans, especially if they are held in a tax-free PEP.

"Unit and investment trusts give much greater flexbility. You can increase or decrease monthly payments, switch between different funds and you are not locked in."

But it is not only the rigidity of unit-linked life policies that counts against them. This in itself is not a problem for those who last the course. "At the end of the period you are probably going to get a half-decent return. But almost certainly if you choose a unit or investment trust instead you will make more money," says Mr Cockerill. More powerful arguments are to do with cost and tax-efficiency. Charges on life insurance policies are invaribly greater than on unit trusts and PEPs, not least because of the greater commission paid to the sales rep. The commission factor is what makes life company sales reps so keen to sell their wares - despite an investor protection regime designed to guard against the selling of inappropriate investments.

Sales reps may make the tax-free nature of a policy's eventual payout a big part of the sales puff. But while investors pay no tax on qualifying policies, the investment returns within the fund have been subject to income tax and capital gains tax. By contrast, there is no tax on unit and investments trusts held within a PEP.

But if there are strong arguments against using a life policy for regular savings, does the same apply to lump sumps put into insurance-based investment bonds? The tax arguments are again paramount.

Graham Hooper, of Chase de Vere, says: "A company may run two funds, one a unit trust, one an investment bond. If the underlying assets are identical, the underlying unit trust is going to do better because the unit trust doesn't pay capital gains tax internally."

There may be a benefit to some higher rate taxpayers who also use up their annual capital gains tax exemption - pounds 6,000 in the current tax year. Against this possible tax advantage you have to weigh any extra charges on a bond investment compared with a unit trust.

One popular variety of investment bond may have a place. With-profits bonds are designed to iron out stock market fluctuations. As such, they can appeal to more cautious investors. "They have a lower risk profile than unit trusts. They may suit people who want a better return than cash on deposit, but the return will still be lower than a good unit or investment trust," says Tim Cockerill.

Another widely held variety of bond is the distribution bond. These aim to provide a higher income than the building society deposit and the possibility of some capital growth. Mr Hooper says: "We would recommend a distribution bond for people who want a growing income and stability."

He acknowledges the tax disadvantages, but likes the market leading bond from Sun Life largely because of its track record. "The product may be suitable for people who use the building society rather than the equity markets as a yardstick."

And it is the performance of Sun Life's pounds 3bn distribution fund that the company's marketing manager, Keith Middleton, sees as the main selling point. He willingly recognises some of the drawbacks. "The advantages are gradually being eroded. People should look at unit trust PEPs, with their greater flexibility. But PEPs do have an annual investment limit of pounds 6,000, which is too low for many investors."

He also says the concept of a managed fund - with less emphasis on shares and more on gilts and other fixed interest investments - is harder to find among unit trusts.

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