Aviva Portfolio Bond

Polaris

Hi,
I have an Aviva Portfolio Bond which I have held for over 13 years now. It was set up for me by a financial adviser as a first tentative step into 'investing' rather than 'saving'. The bond was originally invested in the Guaranteed fund, but was switched into With Profit fund at the end of the five year guarantee period.

During the interim period, I have become a lot more confident in making my own investment decisions (but my no means consider myself an expert!). I have become frustrated with the relatively poor investment returns, and the lack of legacy (GA) funds available to me compared to the hundreds available for new investors.

Ideally, I would like to cash the bond in so I can invest in something else, but as a borderline higher rate tax payer, I know this will give rise to a higher rate tax liability which I would like to avoid. Am I therefore correct in thinking that I am 'stuck' with this bond, with the only option to diversify into one or more of the few legacy (GA) funds available to me, or is there another option that I am missing?

Many thanks in advance for your help.

jem16

Polaris wrote: »

Ideally, I would like to cash the bond in so I can invest in something else, but as a borderline higher rate tax payer, I know this will give rise to a higher rate tax liability which I would like to avoid.

How much liability will it create? Basically you need to take the profit and divide by the number of years (13?) to give you the liabilty after top slicing relief.

If this isn't any help, have you made any withdrawals during the life of your bond? If not you have 5% for each year you haven't used so that could possibly give you 65% ( 5% x 13) able to withdraw tax free.

Am I therefore correct in thinking that I am 'stuck' with this bond, with the only option to diversify into one or more of the few legacy (GA) funds available to me, or is there another option that I am missing?

Have you checked with Aviva or your IFA is that is definitely the case?

kidmugsy

You could always avoid any potential 40% tax liability by making extra contributions to your pension in the relevant tax year.

Polaris

Thanks both for your replies.
I have spoken to Aviva, and while they don't exactly say 'I'm stuck with it', they do confirm there are only about a dozen Aviva funds available to switch into since the bond is ex-General Accident. They have obviously explained several options including partial cashing in and using the proceeds to invest in a new bond which would then have access to all the available funds, plus an 'enhanced allocation rate' but why would I want to when I can invest directly in Newton/Invesco/Aberdeen etc funds myself, plus there would probably be charges applied to the new bond?

I calculate the gain (current value less amount invested) is about £10k, so approx, £700 per year when divided by 13 years I have held the bond. However, I was under the impression that if this took you into the higher rate tax bracket, you then had to pay the extra tax on the whole amount of the gain -have I got that wrong?

Looking at the other option, I haven't taken any withdrawals, so I could take 5% per year, but again, I thought that was 5% of the original amount invested, not of the current value.

The idea of using pension contributions to offset a gain is certainly interesting - I tried doing that last year to offset a higher rate tax liability arising because of some overtime payments (still waiting to hear from HMRC to see if I managed to get it right!!). I wasn't aware I could use the same trick in this situation.

Can anyone confirm how I would calculate the amount of higher rate tax due? Is it just the £10k gain x 20%?

jem16

Polaris wrote: »

They have obviously explained several options including partial cashing in and using the proceeds to invest in a new bond which would then have access to all the available funds, plus an 'enhanced allocation rate' but why would I want to when I can invest directly in Newton/Invesco/Aberdeen etc funds myself,

To save the higher rate tax that you would have to pay on the dividends?

plus there would probably be charges applied to the new bond?

No idea.

I calculate the gain (current value less amount invested) is about £10k, so approx, £700 per year when divided by 13 years I have held the bond. However, I was under the impression that if this took you into the higher rate tax bracket, you then had to pay the extra tax on the whole amount of the gain -have I got that wrong?

It's complicated.

Basically let's say that the £700 took you into the higher rate tax by £500. Tax would be as follows;

£200 x 0%= no tax
£500 x 20% = £100

This is the tax on one slice. This is then multiplied by 13 so £100 x 13 = £1300.

So tax due would be £1300 as opposed to £10k x 20% = £2000.

If the whole £700 took you into higher rate it would be £700 x 20% = £140 x 13 = £1820.

Calculator here explaining it;

http://www.invidion.co.uk/investment_bond_calculator.php

So how much into the higher rate would you be?

Looking at the other option, I haven't taken any withdrawals, so I could take 5% per year, but again, I thought that was 5% of the original amount invested, not of the current value.

Yes 65% of the original amount.

The idea of using pension contributions to offset a gain is certainly interesting - I tried doing that last year to offset a higher rate tax liability arising because of some overtime payments (still waiting to hear from HMRC to see if I managed to get it right!!). I wasn't aware I could use the same trick in this situation.

Shouldn't be any problem. Simply pay an extra £700 or whatever into your pension and avoid any extra tax.

Polaris

Many thanks for your help and the useful examples. It certainly gives me another option to consider. I can't give you an exact figure for the higher rate - depends on overtime payments, but I was looking at worse case scenario.

Thanks again.

PS I know there would be higher rate tax due on the dividends, but I was thinking about investing in the funds in an ISA either next year or rejigging some existing ISA investments.

jem16

Polaris wrote: »

PS I know there would be higher rate tax due on the dividends, but I was thinking about investing in the funds in an ISA either next year or rejigging some existing ISA investments.

Ok - I was assuming the amount involved would be too large for an ISA contribution but perhaps not.