Investment Bond -Prudential

EdInvestor

Myrmidon_J wrote: »

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.

This has in the past been an advanatge but for higher rate taxpayers only.
It most certainly isn't an advanatge to an investor like the OP who should be using his stocks and shares ISA and investing directly into the funds.

That way he would not be paying unreclaimable basic rate tax as he is in the bond, thus losing up to 20% of his gains.

willhay99

I'm still a little confused (Mainly by the example on the Pru website!)

***.pru.co.uk/pdf/investments/INVS0002.pdf (not allowed to include links)

In their example they don't appear to subtract the original investment!
e.g.

For example, say an investor invested £20,000 into one single policy. Towards
the end of the second policy year she/he unexpectedly needed to make a
withdrawal of £10,000. Let’s say that the fund used was a ‘high risk – high
potential reward fund’ and at the time the money was needed, the investor’s
bond value was only £17,000.

The investor instructs Prudential to pay him/her £10,000 as a partial withdrawal.
On the second anniversary, Prudential are required to issue a ‘Chargeable Event
Certificate’ (CEC) to the policyholder showing that the £10,000 was withdrawn,
but 2 years’ of 5% were available (2X5% of £20,000 = £2,000) so the ‘chargeable
event gain’ (the gain) shown on the CEC would be £10,000 – £2,000 = £8,000.

Thus, even though the overall value of the bond had fallen by £3,000 (–15%),

tax on the ‘excess’ withdrawals of £8,000 would have to be paid.

For a high rate tax payer

If the investor was already a
‘Higher Rate Taxpayer’ before
taking account of ‘the gain’, tax
would be due for the tax-year
within which the 2nd anniversary
date of the bond, occurred. This
would be calculated as (currently)

20% of £8,000 = £1,600.


For my particular case as a high rate tax payer
Invested £17,500 over 10 years (no withdrawals) - fund value £23,000
Anyone suggest what my tax liability is?

Seems tax and charges will wipe out most my gains - I feel like I'm "trapped" in the fund until I retire (another 10 years) if I want to avoid paying withdrawal tax.
(Wonder if this is another PPI scandal waiting to be exposed! - I feel like I've been the victim of a scam!)

P.S. The Pru on the pdf make a curious statement at the end

To help counter such excessive and artificial gains, Prudential issues Single Premium
Bonds as a series of identical policies, unless you instruct us to the contrary. This allows
for the full cashing in of one or more policies, rather than a large partial withdrawal

spread across the whole Bond.

Anyone know how this works?

dunstonh

***.pru.co.uk/pdf/imvestments/INVS0002.pdf (not allowed to include links)

link isnt working (getting oops page on pru)

In their example they don't appear to subtract the original investment!
e.g.

its partial withdrawal on a single policy segment. Not a full surrender.

P.S. The Pru on the pdf make a curious statement at the end
To help counter such excessive and artificial gains, Prudential issues Single Premium
Bonds as a series of identical policies, unless you instruct us to the contrary. This allows
for the full cashing in of one or more policies, rather than a large partial withdrawal

Not curious. That is standard with investment bonds. It allows withdrawals to be taken from one policy segment creating a full surrender one 1 or more segments rather than creating a chargeable gain on the whole lot.

Invested £17,500 over 10 years (no withdrawals) - fund value £23,000
Anyone suggest what my tax liability is?

chargeable gain of £5500

Wonder if this is another PPI scandal waiting to be exposed! - I feel like I've been the victim of a scam!

How can it be a scandal? The life assurance wrapper has rules set by HMRC. These have hardly changed in decades. The fact you don't understand them and are making incorrect assumptions does not make it a scam.

willhay99

Thanks for the rapid reply - have corrected the link

Still not sure why in the case of the Pru example the customer should be taxed on a loss - seem to be taxed for withdrawing their own money

Slim

Myrmidon_J is your calculation correct when the profit slice (ie £5,714) takes an individual into a higher tax band?

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].

Using your figures with earnings of £30,000 - amount in higher rate tax band is (30,000 + 5,714 - 34,800) ie £914. Extra tax on this is £182.80 which multiplied by the number of complete years (7) gives a total tax payable in the year of £1,279.60. Or am I missing something?