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Canada Life Article - Partial Withdrawals

Understanding partial withdrawals


The 5% tax-deferred allowance for partial withdrawals from life policies has been available for many years.  It is helpful to taxpayers who want to minimise their administrative responsibilities but, since it ignores the actual growth (or loss) of the funds within the life policy wrapper, partial withdrawals in excess of the allowance can produce chargeable gains that are wholly artificial.  Recently, this has resulted in some policyholders inadvertently realising very large taxable gains that had no basis in reality when compared with the actual value of the life policy.

HMRC have issued a consultation that seeks to address this.  Two of the three methods suggested in the consultation retain the original 5% allowance, and the third suggestion replaces the 5% annual allowance with a 100% lifetime allowance.

The first suggestion is that, if a partial withdrawal is taken in excess of the 5% allowance, a calculation is made to determine the chargeable gain only in respect of the excess.  The calculation would be along similar lines to the calculation required where part of the capital is withdrawn from an investment subject to capital gains tax, sometimes referred to as the A/A+B calculation.  This would mean that, if the life policy hadn’t grown in value a great deal or not at all, the amount of taxable gain would reflect that.

The second suggestion is that, rather than have a 5% tax-deferred allowance each year, the policy would have a lifetime 100% allowance.  In other words, policyholders would be able to make partial withdrawals up to the amount(s) that they had paid into the policy at any time, without triggering a chargeable gain.  This has the merit of simplicity and would be very easy for policyholders to understand.  It would also avoid any artificial gains being realised.

Finally, the third suggestion is to retain the 5% tax-deferred allowance and, if any partial withdrawals are made in excess of the allowance, they would be deferred if they were greater than a pre-determined amount (the consultation suggests 3% of the premium as an example).  The gain arising from the next partial withdrawal would be increased by the amount of the deferred gain from the earlier event.  If this total gain exceeded the pre-determined amount, then the excess part of it would be deferred again (and so on).  This method would not avoid triggering artificial taxable gains, but it would limit these to the pre-determined amount at the time of the partial withdrawal.

It is pleasing to note that all of the suggestions in the consultation document retain the benefit of being able to make regular, or irregular, partial withdrawals without triggering an immediately taxable gain.  This is a very valuable facility that many policyholders greatly appreciate.  Some suggestions are simpler than others and some will require more changes to providers’ systems than others.  Whatever the outcome of the consultation is, however, it is clear that the need for financial advice will still be paramount, as will the provision of technical support from product providers that can be easily accessed by financial advisers.


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Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority.

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Stonehaven UK Limited and MGM Advantage Life Limited, trading as Canada Life, are subsidiaries of The Canada Life Group (U.K.) Limited. Stonehaven UK Ltd is authorised and regulated by the Financial Conduct Authority. MGM Advantage Life Limited is authorised and regulated by the Financial Conduct Authority.