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Investment Bonds Technical

Risk Warnings

Please note the following risk warnings:

    • Investment bonds are medium to long-term investment and should not be entered into if you envisage withdrawing your money during the first five years.
    • Redemption penalties may apply on the early surrender of this contract, as shown in the product provider’s personalised illustration.
    • For a full explanation of the charges, please refer to the personalised illustration supplied by the product provider. This describes the features of the contract and the various ways the provider charges to provide those features.
    • The value of the investment is determined by the value of units, the price of which can fall as well as rise. The overall value of the investment is therefore not guaranteed and you might get back less than you originally invested, especially in the early years.
    • You should remember that past performance is not necessarily a guide to future performance.
    • You will receive a summary of the plan details from the product provider shortly after completion of an application form.  If within 14 days of receipt of this you should wish to cancel the plan, you can do so by returning a ‘cancellation notice’ that is included with the paperwork they send you.
    • If your selected withdrawals exceed 5%, you will be subject to income tax at your highest marginal rate on the withdrawal amount over 5%.
    • Where a fund invests in overseas markets, changes in currency exchange rates can affect the value of your investment.
    • If income is taken at a rate which exceeds the net growth of the fund, your original capital will be eroded.

Tax Treatment

The underlying funds of Investment Bonds are subject to tax within the fund on income and gains. Any ‘income’ you need is achieved by stripping the required amount from the bond. For tax purposes, in effect you will be drawing on the capital you invested. Although, it is possible to draw income from the investment, it is most likely to be in your best interest to defer taking income from the bond for at least the first 12 months should you decide that this is required.

Investment bonds are sometimes, incorrectly, described as a tax-free investment when they should really be described as tax-paid. Basic rate tax is deemed to have already been paid within the fund by the fund manager, and as such a basic rate taxpayer will have no further liability to either income or capital gains tax. All taxpayers can benefit from the ‘5% rule’ which allows them to withdraw up to 5% of the initial premium for up to 20 years and defer any tax liability. Any of the 5% not withdrawn in any year can be rolled forward to future years.

With regards to withdrawals in excess of the 5% entitlement, any such excess would be added to the individual’s taxable income in the year and only if income then exceeds the basic rate threshold would a tax liability arise. The fund is deemed to have suffered 20% on its own income and capital gains. The liability on the excess for a higher rate tax investor will thus be 20% (higher rate tax of 40% less tax deemed paid of 20%).

The final ‘sweeping up’ chargeable gain on full encashment is calculated by adding the amount paid on surrender to the total of all previous withdrawals and deducting from that the total of all previous chargeable excesses and the single premium paid.

The gain is then top sliced over the total number of years that the policy has been in force and the ‘slice’ added to income to establish the tax rate applicable.

Please note that the tax paid within the fund cannot be reclaimed by a non taxpayer.

If you are entitled to the “Age Allowance”, any withdrawals in excess of 5% per annum and any gain you make on final encashment may reduce or eliminate your increased personal allowance.

If you have made an additional investment at any time, the 5% allowable will then also apply to that investment on the same basis and for 100% return of that sum.

  • You are allowed to withdraw 5% of the original amount invested each year (this 5% is cumulative so if you do not use it in one year you can carry it forward to future years) without any immediate liability to tax, or having to declare anything on your tax return up to a maximum amount of 100% of the initial investment.
  • Any withdrawals exceeding 5% of the original amount invested may give rise to a charge to income tax at the appropriate rate.
  • On full encashment of the investment bond, a “chargeable event” will occur. If you are close to the higher rate band this may give rise to a charge to higher rate income tax. If the gain has been made over a number of years, it is divided by the number of years the policy has been in force.  This process is known as “top slicing”.  Provided the “slice” does not put the investor into the higher rate tax band, there is no further tax to pay as the insurance company has already paid tax within the fund.

Capital Gains Tax Treatment

  • Life assurance bonds are not generally subject to capital gains tax as long as the policyholder is the owner on encashment.