Topping up an existing investment bond

When you have an additional sum of money to invest, and the advice is to use an investment bond, we’re often asked if it’s better to top up an existing investment bond or buy a new one. 

There are several factors to consider, and we'll go through some of these considerations below. Firstly, look at whether the investment bond product allows top-ups. If the policy terms and conditions don’t allow additional investments to be made, then this is a non-starter, and a new investment bond is the route to go. 

Which Canada Life products allow top-ups?

The following Canada Life products allow customers to make additional top-ups.

Once you've confirmed that the policy allows top-ups, it's worth thinking about how the existing bond is set up before deciding whether topping up is the best option: 

1. Who are the lives assured? 

Are you the only life assured on your bond? Or does it include multiple (often younger) lives assured? Alternatively, is it a capital redemption bond, where there are no lives assured?

This matters because if you’re the sole (or last surviving) life assured, your death can bring the bond to a natural end and trigger a chargeable event. Here, if you’re the sole owner of your bond, any gain is treated as arising to you. This could create an income tax liability depending on your tax position at the time. Bear in mind that you may be a higher or additional rate payer.

In this instance, you may want to think carefully before adding more money to your policy because you could be increasing the value of an investment that may give rise to an income tax charge on your death.

It’s also important to know that changing the lives assured isn’t usually a simple administrative update. Adding or removing a life assured is a fundamental change to the terms of the policy, which means that the old contract ends and a new one is substituted in its place. This will likely have chargeable event consequences.

Alternatively, setting up a new bond with younger lives or on a capital redemption basis would allow it to continue after your death and gives more control over who is ultimately taxed.   

2. Is the underlying fund or investment choice restricted?  

Some investment bonds only offer a limited range of funds. If your bond is one of these, topping up may mean your added money is also invested within the same fund range.

If having a broad range of funds to choose from matters to you, it may be worth comparing your existing bond with a new bond that offers a wider selection. Your adviser can help you check what’s available and what may best suit your circumstances.

3. How many segments or individual policies are there? 

Segmentation provides greater flexibility. A top-up is generally distributed equally across the existing number of segments, increasing the investment amount. It’s unusual for a provider to create new segments with a top-up. So, if the existing investment bond doesn’t have many segments, then the flexibility in gifting and tax planning will be restricted. You may want the flexibility of using a new investment bond with greater segmentation.