Investment Bond -Prudential

Melde

How safe are these investments?

Is there a limit garantee on the ammount invested? Eg. £50.000 garanteed by the banks.

If I intend to cash-in the value of the bond, what are my tax liability?

I have had monthly withdrawls for 7 years.

What about capital Gain Tax?

Thank you very much.

Myrmidon_J

Melde wrote: »

How safe are these investments?

That depends entirely upon the investment (read: fund selection). 'Investment bond' is a tax wrapper, not a fund; so we cannot tell (from what you have posted) the safety - or not - of your investment.

Is there a limit garantee on the ammount invested? Eg. £50.000 garanteed by the banks.

To an extent, it depends on the fund (again). Some funds have a built-in guarantee, but if you invested seven years ago this seems unlikely.

'With Profits' funds have their own bizarre guarantees - the policy value cannot decrease (annual bonuses cannot be removed), but the terminal bonus can be (and has been) slashed - and an MVR might apply. This has the effect of reducing the cash-in value, perhaps to below the level of your initial investment.

Most funds have no guarantee.

However, if the underlying company or manager were to go bust (extremely unlikely, in your case), your investment is protected by the Financial Services Compensation Scheme: the first £2,000 is 100% guaranteed and 90% of the remainder with no upper limit.

If I intend to cash-in the value of the bond, what are my tax liability?

I have had monthly withdrawls for 7 years.

What about capital Gain Tax?

Your tax liability depends on your tax status.

Investment bonds are a tax wrapper, as I said earlier; the advantage of this particular wrapper is that Basic Rate tax is paid within the bond.

To calculate your potential tax liability:

Surrender value (the cash in your hand)

PLUS the sum of all withdrawals to date
LESS the investment amount

DIVIDED by the number of complete years that you have held the bond

ADD this figure to your income for the tax year in which you cash in the bond. If the final total is less than the Higher Rate tax threshold, you have no liability. If it is above the threshold, you pay the "extra" on the full sliced sum.

E.g.

Surrender value: £105,000
Plus withdrawals: £35,000 (£140,000)
Less investment amount: £100,000 (£40,000)

Divided by number of complete years: 7 (£5,714)

Add to income for the (tax) year... If you earn £20,000 p.a., there is no tax liability [(£20,000 + £5,714) < £34,800] - but if you earn £30,000, you must pay £8,000 [£40,000 * 0.20] as [(£30,000 + £5,714) > £34,800].

I hope that makes sense.

Please note that this is my understanding of current legislation and may not, in fact, be correct. (Though I sincerely hope it is.)

Do not rely solely on my knowledge!

dunstonh

I have to say that Pru investment bonds in the with profits funds have been doing very nicely for a long time now and have come through this crisis very well. However, they have added market value reductions rather than reduce the terminal bonuses as much so those surrendering will be hit rather than those staying put.

Some versions of the Pru bond have allowances for withdrawals upto a certain amount without an MVR being charged but I am not sure your timescale fits with one of those.

Myrmidon_J

dunstonh wrote: »

I have to say that Pru investment bonds in the with profits funds have been doing very nicely for a long time now and have come through this crisis very well. However, they have added market value reductions rather than reduce the terminal bonuses as much so those surrendering will be hit rather than those staying put.

I think the old Prudential warhorse has done very well indeed. But I was under the impression that final bonuses had, in fact, been cut quite drastically... (Hardly surprising.)

What's more interesting (to me) is the direction the fund manager is taking. Very positive and very sensible - in my view.

dunstonh

I was under the impression that final bonuses had, in fact, been cut quite drastically... (Hardly surprising.)

No. The ones on my books have seen typically very small amounts reduced. The MVR is where the hit is.

I did a policy review on one on the 18th December just gone and it was valued at £51,071. On 08/01/2008 it was valued at £53,909.27. It has £2800 paid out in withdrawals in that year. So it really hasn't seen any loss in value. However, the MVR is 10%. I'm quite happy with that.

What's more interesting (to me) is the direction the fund manager is taking. Very positive and very sensible - in my view.

Pru have been very successful in their timings with regards to asset allocation and rebalancing. I have never been a fan of with profits but Pru do seem to come in with the results consistently and act and perform like a with profits fund should do. A bit late though nowadays as its only really the Pru and NU that have viable with profits funds. The rest are mostly a waste of space. (generalisation alert!!!! - bound to be exceptions to that )

Melde

So going on Myrmidon_J's calculations :

Surrender value = £86000
Withdrawls = £20000
Investment = £82500

Difference = (86000 + 20000) - 82500 = £23500

Yearly ammount = 23500 / 6 = £3917

Yearly salary is 8k which is already taxed, so therefore would you just have to work out what the tax difference would be for the £3917 for that year.

Also having two of the same bond would give £7834 per year keeping the overall yearly income at less than 20k.

So going by this there would not be any payable capital gains.

Do this look right?

dunstonh

So going by this there would not be any payable capital gains.

There is no capital gains tax to pay on investment bonds. Its income tax and only if the top slice takes you into higher rate (or you are already higher rate).

Melde

:j Ok cool thanks for that so as far as I'm concerned I won't owe the tax man a penny.

:beer:

Thanks all for your replies on this matter.

Myrmidon_J

Melde wrote:

So going on Myrmidon_J's calculations...

Please, please don't rely solely on my calculations! Whilst I'm fairly certain that I've got the right idea, I'm not qualified to offer financial advice - not that this website is the place, in any case...

If in any doubt, you should be able to request information from the Prudential (though they will not advise you either way).

Melde wrote:

So going by this there would not be any payable capital gains.

Dunstonh is right - any gains are (potentially) taxed as income - so with a salary of £8,000, there should be no further liability.

Dunstonh wrote:

Myrmidon_J wrote:

I was under the impression that final bonuses had, in fact, been cut quite drastically... (Hardly surprising.)

No. The ones on my books have seen typically very small amounts reduced. The MVR is where the hit is.

I did a policy review on one on the 18th December just gone and it was valued at £51,071. On 08/01/2008 it was valued at £53,909.27. It has £2800 paid out in withdrawals in that year. So it really hasn't seen any loss in value. However, the MVR is 10%. I'm quite happy with that.

How strange. We've recently completed a mammoth project on the Prudential 'With Profits' fund (I work for an IFA), and whilst some of our clients have not seen any reduction in terminal bonus - mostly those invested in a pensions wrapper - others have seen reductions of £6 - £8K on a policy value of £80K.

Admittedly, these clients are unfortunate victims of the worst 10 year rolling period in (modern) investment history, but still!

I'd be very interested to know the (general) details of the experience of your clients...

Melde

Just an update on my situation. I fully surrendered my policy:
1) Original Investment = £82,500
2) Surrender value = £84,600 ( MVR £9,500)
3) Years Invested = 7

Now I have received a Chargeable Event Certificate which states there is a Notional tax of £4,700.

This states that in my next self assessment under "Gains on UK Life insurance policies (with notional tax)", which can be found under the heading "income" I must add this information.

Do I actually need to complete a tax return and pay this tax as I am low rate tax payer or can I just file it and forget about it?

This has confused me a bit!

dunstonh

Do I actually need to complete a tax return and pay this tax as I am low rate tax payer or can I just file it and forget about it?

You can forget it as it doesnt take you into higher rate tax.