The tax-efficient nature of onshore and international investment bonds has brought them into sharper focus following the Autumn Budget in November. However, in the following analysis, Ben Heffer, Insight Consultant at Defaqto, highlights how the shrinking nature of the market is set to mean less choice for advisers and their clients.

Use of the annual 5% withdrawal allowance and the judicious encashment of segments can help to defer and/or reduce a client’s tax bill and, placed in trust, bonds can be an effective shelter against inheritance tax.

With the inheritance tax take on the rise driven primarily by fiscal drag, and CGT receipts also increasing due not only to frozen annual allowances but also increased rates of taxation, advisers will be investigating the most tax efficient investments for their clients, which may include onshore and international bonds. However, the product market has suffered a certain amount of shrinkage recently and the choice for advisers and their clients is more limited than it was.

Onshore bonds

There are 26 different bond products from 16 providers. Unlike international bonds, which typically have a wider range of investment options, many onshore bond products offer a more limited range of internal funds. Indeed, only seven onshore bond products offer open architecture funds – those from HSBC, Nucleus, and Transact.

A with-profit or smoothed fund option is available from 11 products and seven of those are solely with-profit or smoothed fund bonds from five providers: Healthy Investments, LV=, Metfriendly, National Friendly, and Sheffield Mutual Friendly Society. In terms of unit linked funds, the offerings range from a modest nine funds from NFU through several thousand to unlimited from Countrywide Assured.

Provider	Number of Funds
abrdn	44
Aviva	6,000
Countrywide Assured	unlimited
HSBC Life	3,800
LV=	5
NFU Mutual	9
Nucleus	3,200
Prudential	63
Quilter	2,600
Standard Life	152
Transact	8,500
Wesleyan Assurance Society	17

Source: Defaqto

In recent research from Defaqto among financial advisers, open architecture products were favoured over restricted fund ranges, and onshore bonds over international products. When asked, 67% of advisers said they had recommended open architecture onshore bonds in the last twelve months and 60% said they had recommended open architecture international bonds. By contrast, 35% had recommended restricted fund onshore bonds and just 28% restricted fund international products.

International bonds

Defaqto’s database has 63 international bond products from just 11 providers. These are the products that are available to UK investors – those who are contemplating moving abroad at some point in the future, or those who are looking for a wide range of investments and who wish to defer their taxation, or indeed those who favour bonds for estate planning.

Apart from Lombard International Assurance, based in Luxembourg, five of the providers are based in Dublin and five in the Isle of Man. Canada Life International and Utmost, which it is estimated together account for 50% of the market, have branches in both offshore centres and offer a range of products purpose-designed for specific circumstances, including, for example, estate planning. On average, offshore bond providers offer six options each representing different charging structures or different fund choices to suit client circumstances.

With the exception of Prudential, all international bond providers offer open architecture funds on some if not all of their product offerings, potentially affording the investor an unlimited fund choice.

Mergers, acquisitions and closures

On the face of it there appears to be a good range of products and providers in the bonds market; however, the number of actors is declining. In November 2021, Quilter International was rebranded as Utmost International Isle of Man. In August 2023, Prudential’s Prudence Inheritance Bond closed to new business. In January this year, Canada Life’s Select Account and RL360’s Fusion Wealth Offshore Bond closed to new business.

In March, Prudential International’s Investment Portfolio and Prudential’s Onshore Portfolio bonds both closed, and in May, Foresters Friendly Society closed its Investment Bond.

July saw the announcement that Lombard International will become a part of Utmost International, further contributing to Utmost’s dominance of the international bonds market; and, at the same time, a proposal is in train to transfer the business of the Isle of Man Assurance to RL360, which is expected to complete by the end of the year.

Whilst these mergers and acquisitions doubtless make for stronger bond providers, taken together with the recent product closures outlined above, it nevertheless represents a contraction in the product market with less choice for advisers and their clients and potential concerns about evidencing fair value.

It should also be noted that 13 of the onshore bond products and eight of the international bond products are platform exclusive products having been designed as a tax wrapper for client money held on particular adviser platforms. Whilst advisers place most of their business on platforms – 75% on average according to the latest Defaqto research – there will be those who do not and so the platform exclusive products will be unavailable to them reducing the product choice still further.

It would be encouraging if the prevailing political position resulted in new entrants to the onshore and international bond market, but in these days of consolidation within financial services generally, the prospect seems remote.

Ben Heffer, Insight Consultant, Defaqto