Taking money from a bond
Individual policy surrender or partial surrender?
Canada Life investment bonds offer the facility to divide the premium into a series of identical policies.
This means that clients wishing to withdraw part of their investment have a choice as to how to take it, either by taking a partial surrender or by surrendering individual policies.
Which way is best will depend on the client’s circumstances at the time. Before deciding which option is suitable there are a number of factors to take into consideration.
Points to consider
One of the main benefits of an investment bond is tax deferral. Part surrenders of up to 5% of the total premiums paid, can be withdrawn without any immediate personal liability to tax. Any unused 5% allowance can be carried forward to future years.
Where the cumulative 5% allowance is exceeded a chargeable gain will occur. So, where a client withdraws a significant partial surrender a substantial chargeable gain could occur as there is no correlation between the gain and the growth on the bond.
Any withdrawal will be taken into account on the eventual full surrender or maturity of an investment bond or the death of the last surviving life assured.
The timing of the chargeable event also needs to be considered. Chargeable gains in respect of withdrawals are calculated at the end of the policy year, whereas gains on policy surrenders are calculated on the actual date of the event.
These dates may fall into different tax years, meaning that the tax bill is payable earlier. Also, if the client has fluctuating income the timing of the chargeable event may be crucial.
The entitlement to future 5% withdrawals also needs to be considered. If a full policy surrender is used the encashment of policies means that the 5% withdrawal will not be available on those policies in future.
For example, if a client starts with 100 individual policies of £1,000 each and surrenders 20 individual policies, their 5% tax deferred withdrawal allowance will immediately drop from £5,000 each year to £4,000.
Also, any 5% withdrawal allowance carried forward and not used in respect of previous years for the policies surrendered will be lost.
So which is best, a partial surrender or policy surrender?
It is truly ‘horses for courses’ and depends on the client’s circumstances. As a general rule, if the amount required is less than the 5% withdrawal allowance, use that.
If the amount required is much higher than the 5% withdrawal allowance, or regular withdrawals have used it up, policy surrenders would normally be best.
And whilst not wishing to complicate matters further, in some cases the lowest chargeable gain figure can be achieved by taking a combination of withdrawal and policy surrenders.
Examples |
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a. 5% withdrawal covers the amount required |
b. Large partial surrender |
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| Bond commenced | 01/05/2014 | Bond commenced | 01/05/2022 |
| Premium | £100,000 | Premium | £100,000 |
| Policies | 100 at £1,000 each | Policies | 100 at £1,000 each |
| Withdrawals to date | nil | Withdrawals to date | nil |
| Withdrawal required | £40,000 on 01/11/2023 | Partial surrender required | £72,600 on 01/11/2023 |
| Current surrender value | £160,000 (£1,600 each policy) |
Current surrender value | £110,000 (£1,100 each policy) |
Partial withdrawal |
Partial withdrawal |
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| Cumulative 5% allowance | 50% (including current policy year |
5% allowance | 10% (including current policy year |
| Allowance | £50,000 | Allowance | £10,000 |
| Partial surrender | £40,000 | Partial surrender | £72,600 |
| Chargeable gain | nil | Chargeable gain | £62,600 |
| Date of chargeable event | not applicable | Date of chargeable event | 30/04/2024 |
| Top slice | £31,300 | ||
| Tax year | 2024/25 | ||
Individual policy surrender |
Individual policy surrender |
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| Amount required | £40,000 | Amount required | £72,600 |
| Number of policies encashed | 25 | Number of policies encashed |
66 |
| Gain for each policy | £600 | Gain for each policy | £100 |
| Chargeable gain | £15,000 | Chargeable gain | £6,600 |
| Date of chargeable event | 01/11/2023 | Date of chargeable event | 01/11/2023 |
| Top slice | £1,667 | Top slice | £6,600 |
| Tax year | 2023/24 | Tax year | 2023/24 |
| 5% allowance now £3,750 a year | 5% allowance reduces from £5,000 to £1,700 a year | ||
c. 5% withdrawal used up |
Partial withdrawal |
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| Bond commenced | 01/05/2018 | 5% allowance | 0% (fully used) |
| Premium | £100,000 | Allowance | nil |
| Policies | 100 at £1,000 each | Amount required | £38,000 |
| Withdrawals to date | Year 1 & 2 £5,000 (taken in July each year) |
Chargeable gain | £38,000 |
| Year 3 £6,000 taken in July (1,000 chargeable gain 30/04/2021) |
Date of chargeable gain | 30/04/2023 | |
| Year 4 & 5 £5,000 (taken in July each year) |
Top-slice | £19,000 | |
| Partial surrender required | £38,000 on 01/11/2022 | Tax year | 2023/24 |
| Current surrender value | £95,000 (£950 each policy) |
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Individual policy surrender |
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| Amount required | £38,000 | ||
| Number of policies encashed | 40 | ||
| Gain per policy | £200* | ||
| Chargeable gain | £8,000 | ||
| Date of chargeable event | 01/11/2022 | ||
| Top slice | £2,000 | ||
| Tax year | 2022/23 | ||
| 5% allowance reduces from £5,000 to £3,000 per year | |||
*This gain arises because the calculation on a policy surrender takes into account the previous withdrawals on each policy.
d. Combination |
Combination
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| Bond commenced | 11/04/2019 | Number of policies | 198 encashed |
| Premium | £680,000 | Proceeds | £202,569 |
| Policies | 680 at £1,000 each | Gain for each policy | £173 |
| Withdrawals to date | 26/03/2021 £68,000 & 28/04/2021 £34,000 |
Chargeable gain | £34,269 |
| Amount required | £250,000 on 17/05/2023 | Date of chargeable event | 17/05/2023 |
| Current surrender value | £695,691 (£1,023 each policy) |
Top slice Tax year |
£8,567 2023/24 |
| 5% allowance now £24,100 a year | |||
Partial withdrawal |
Partial withdrawal
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| 5% allowance |
£34,000 x 5 years (including current policy year) |
5% allowance | £24,100 x 5 years (including current policy year) |
| Allowance | £170,000 | Allowance | £120,500 |
| Less previous withdrawals |
£102,000 | Less previous withdrawals on 482 policies remaining |
£72,300 |
| Balance of allowance | £68,000 | Balance of allowance | £48,200 |
| Partial surrender | £250,000 | Partial surrender | £48,200 |
| Chargeable gain | £182,000 | Chargeable gain | £0 |
| Date of chargeable event | 10/04/2024 | Total proceeds | £250,769 |
| Tax year | 2024/25 | ||
Individual policy surrender |
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| Amount required | £250,000 | ||
| Number of policies | 244 encashed | ||
| Gain for each policy | £173 | ||
| Chargeable gain | £42,293 | ||
| Date of chargeable event | 17/05/2023 | ||
| Top slice | £10,573 | ||
| Tax year | 2023/24 | ||
| 5% allowance now £21,800 a year | |||
This briefing note is also available as a PDF
This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at April 2024 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.