THOUSANDS of wealthy savers who have bought bonds run by life insurers are being urged to review their investments following the prebudget report.

Advisers say some savers could find themselves paying thousands of pounds more in tax than if they had taken out a unit trust following Alistair Darling’s changes to capital-gains tax.

The Association of British Insurers (ABI) has held urgent talks with the Treasury to negotiate some concessions, but as yet officials are refusing to back down.

Paul Garwood of Smith & Williamson, an accountant, said: “Higher-rate taxpayers should look very carefully at their bonds to check they are the most efficient investment.”

About 750,000 investment bonds are taken out every year, worth £35 billion, according to Cazalet Consulting. Like unit trusts, they invest in the stock market but are taxed differently.

When you cash in a bond, returns are treated as income so higher-rate taxpayers pay 40% and those in the basic-rate band are liable for 20%. In fact, the insurer pays 20% before returns are paid out, so basic-rate taxpayers have nothing more to pay.

With unit trusts, though, returns are treated as capital gains. Before the budget, that meant higher-rate taxpayers paid 40% above their annual allowance, now £9,200, and those in the basic-rate band paid up to 20%.

However, taper relief cut the effective rate of tax down in stages to 24% for higher-rate taxpayers and 12% for those in the basic band, if they had held the investment for 10 years or more.

Following the prebudget report, investors in unit trusts and direct shares will pay a flat rate of 18%, while those with bonds will continue to pay 20% or 40%.

Danny Cox of Hargreaves Lansdown, an adviser, said: “Unit trusts taxed under capital gains are generally better than insurance bonds already, but after the changes they will be at an even greater disadvantage.”

Experts said higher-rate taxpayers, who could pay 40% on a bond but just 18% on a unit trust, were hit most. Adrian Boulding of insurer Legal & General estimates one in ten of its bond customers could be in this position - about 500,000 people if replicated across the industry.

Cox said: “Our message to existing customers is don’t do anything precipitous as these changes do not come into effect until April and there is still time for things to change.”

The ABI is hoping to persuade the government to reduce the tax on insurance products to 18% to bring it in line with unit trusts.

If you did cash in now, you could also face heavy withdrawal penalties of about 10% - unless you took out the bond less than 30 days ago and are still in your “cooling off” period.

New customers, however, should think carefully before taking out an investment bond. Boulding said: “It really does depend on your personal circumstances. If you are a higher-rate taxpayer investing for growth, unit trusts are more attractive than before. However, if you are investing for income, bonds may still be attractive because they allow you to defer the tax.”

With investment bonds, you can take an income of 5% a year with no immediate tax to pay, though you have to settle up when you cash in the bond.

Cox said: “They are useful if a higher-rate taxpayer wants an income but with the ability to defer the tax, perhaps because they may be a basic-rate taxpayer later on. They are also good if you may be caught in the age allowance trap, where the higher allowance for the over65s is reduced by £1 for every £2 of income above £20,900.” Hargreaves Lansdown is reviewing all invest-ment-bond sales in the past month.

Offshore investment bonds are also likely to remain attractive, especially if you plan to retire abroad to a lower-taxed country such as Cyprus. Like onshore bonds, they are merely a tax wrapper that can be put round any investment - cash, equities, investment funds or derivatives. But while the underlying assets in an onshore scheme are subject to tax at 20% on investment gains every year, offshore bonds are taxed only when the individual sells.

Fraser Donaldson of data firm Defaqto said: “While the overall tax rate is the same, the offshore client has had the benefit of paying no tax during the lifetime of the policy, so they are earning interest on money that would otherwise have gone to the Revenue. The gains will have been rolled up gross, possibly with a considerable compounding effect.”

If you invested £50,000 in an onshore bond, you would have a lump sum of £72,294 after 10 years with growth of 7% a year, according to SG Hambros, a private bank. If you invested the same amount in an offshore bond, you would have £72,833 - an extra £539 because your gains would have been rolled up gross. The figures assume higher-rate tax is paid in each case.

In addition, a higher-rate taxpayer could draw income of 5% a year from an offshore bond, with no tax to pay (an onshore bond would have already incurred tax at 20%) and then cash in the bond when they retired to a country with lower taxes - when they would probably be earning less anyway.

Christine Ross at SG Hambros said: “We have had cases where offshore bonds have been entirely tax-free because there is no tax at source and the bondholder has moved to a lower-tax jurisdiction before cashing in.”

Make sure, though, that you take advice on the tax rules in the foreign country.

WHY COULD THEY LOSE OUT?

When you cash in a bond, returns are taxed as income so higher-rate taxpayers pay 40% and those in the basic band are liable for 20%. When you sell unit trusts or shares, returns are taxed as capital gains above your allowance - £9,200 this year. The top rate is 40% for higher-rate taxpayers, though this reduces to 24% after ten years. For basic-rate taxpayers, capital gains tax reduces from 20% to 12% after 10 years. From April, the CGT rate will be 18% for everyone. Biggest losers will be higher-rate taxpayers investing in bonds, paying 40% against 18% if they chose a unit trust.

BOB GETS A BETTER DEAL

Bob Kentish, 59, took out a Halifax personal-investment plan, an insurance bond, with a redundancy payout a few years ago.

The former local-authority manager from Colliers Wood, south London, pictured with his girlfriend, Sandra Silverton, 52, is one of the lucky ones as the budget has made his bond more attractive.

When Bob cashes it in, he will be taxed at 20% as a basic-rate taxpayer. Had he taken out a unit trust instead, he would pay just 12% after 10 years - although this will go up to 18% from April unless the government backs down on the capital-gains tax changes.