Briefing Notes Taking Money From Bond 680 392

Taking money from a bond

What you should consider when taking a full segment surrender or a partial surrender from a bond.

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 Part surrenders of up to 5% of the total premiums paid, can be withdrawn without any immediate personal liability to tax.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.

Do not think that just because the client is a basic rate taxpayer that the chargeable gain can just be ignored. It could be the case that when the top-slice gain is added to the client’s other taxable income, the total will exceed the higher rate threshold.

 

 

Examples

a. 5% withdrawal covers the amount required

b. Large partial surrender

Bond commenced 01/05/2010 Bond commenced 01/05/2018
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 01/11/19 Partial surrender required £72,600 on 01/11/19
Current surrender value £160,000
(£1,600 each policy)
Current surrender value £110,000
(£1,100 each policy)

Partial withdrawal

Partial withdrawal

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  30/04/20
    Top slice £31,300
    Tax year 2020/21

Individual policy surrender

Individual policy surrender

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 01/11/19 Date of chargeable event 01/11/19
Top slice £1,667 Top slice £6,600
Tax year 2019/20 Tax year 2019/20
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

Bond commenced 01/05/2015 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 30/04/18)
Date of chargeable gain 30/04/20
  Year 4 & 5 £5,000 (taken in July
each year)
Top-slice £19,000
Partial surrender required £38,000 on 01/11/19 Tax year 2020/21
Current surrender value £95,000
(£950 each policy

Individual policy surrender

    Amount required £38,000
    Number of policies encashed 40
    Gain per policy £200*
    Chargeable gain £8,000
    Date of chargeable event 01/11/19
    Top slice £2,000
    Tax year 2019/20
    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.

This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at May 2019 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.