Taxation of withdrawals from Aegon Investment bond?

dunroving

I am posting this as an offshoot of a thread I started on the Pensions board, as part of the question relates to an Aegon investment bond (I'm posting this on behalf of a friend). She needs cash to buy a car and is on low income so unable to get a loan. She is looking at taking a lump sum (maybe £8k) from the Aegon bond.

Details of the bond (from previous thread, plus additional information):

... the account is described as an "investment bond" with a bond policy number. Within the policy she is invested in units in two funds; one simply called "Ethical", consisting of UK equities and the Scottish Equitable Kames Ethical Corporate Bond fund.

The bond "current valuation" amount is listed as the same amount as the surrender value (approx. £90k).

Nowhere within the rather limited information in her personal customer pages (i.e., login via the Aegon Web site) does it say whether this is an on-shore or off-shore bond. If withdrawals truly are tax-free that would suit her current situation perfectly but the Aegon customer service rep said withdrawals were liable for income tax.

She opened the bond in May 2008, has not made any additional contributions since then and hasn't taken any withdrawals. She was previously in a Skandia bond and moved to Aegon under the instructions of a financial advisor but I don't know if this was a transfer, change of company owner, or what. So I am not sure whether the official opening date of the bond is 2008 or the date the Skandia bond was opened.

Responses from my post on the other thread:

Withdrawals from an Investment Bond are only tax-free (or to be more precise tax-deferred) if it's 5% of the original amount invested each year. Anything else above that creates a chargeable gain.

The 5% pa withdrawals can be rolled up if not used each year.
When the Bond is finally encashed any withdrawals are added back on to calculate the overall gain to see if tax is due.

…. and:

They are liable for income tax, but the person may not have to pay any. If the bond is onshore, and the person's income plus their average gain on the bond is below the higher rate tax threshold, then there will be no further tax to pay.

The average gain I mention is the total gain divided by the number of years held.

The Aegon rep will not know, or be able to comment on an individual's tax situation.

…. and:

Then she can roll up her 5% withdrawals for each year. So if she took it out 10 years ago she could withdraw 50% with no chargeable gain.

However it doesn't look like your aunt is anywhere near higher rate tax territory so I doubt it will make any difference anyway.
Was her total income ever near higher rate tax or the income limit for the higher personal allowance?

My question(s):

Who would determine/how would it be determined what her tax liability is on any withdrawal from the Aegon bond? Would her accountant be able to advise her on this?

As the bond is 7 years old, could she withdraw 35% (7 years times 5%) of its value tax-free?

dunstonh

Who would determine/how would it be determined what her tax liability is on any withdrawal from the Aegon bond? Would her accountant be able to advise her on this?

Typically a financial adviser. Some accountants might.

As the bond is 7 years old, could she withdraw 35% (7 years times 5%) of its value tax-free?

Yes. However, it may be more tax efficient to cash in policy segments as long as the gain after top slicing relief does not take her into higher rate.

HappyHarry

Two questions:
(i) What is the gain on the bond? The gain being current value less start value.
(ii) What is your friend's taxable income for this year likely to be?

From the above, it should be possible to work out what, if any, tax your friend would need to pay.

dunroving

dunstonh wrote: »

Typically a financial adviser. Some accountants might.



Yes. However, it may be more tax efficient to cash in policy segments as long as the gain after top slicing relief does not take her into higher rate.

- thanks, we are working on a more long-term tax efficient strategy for her to withdraw from this bond and from her Aviva pension over 5 years, while deferring her state pension. At the moment her main concern is to do with taxation if she draws about £10k from her bond in order to fund a new car and a couple of other things.

HappyHarry wrote: »

Two questions:
(i) What is the gain on the bond? The gain being current value less start value.
(ii) What is your friend's taxable income for this year likely to be?

From the above, it should be possible to work out what, if any, tax your friend would need to pay.

The gain is about £30k (£62k balance when opened 7 years ago, £92k current balance)

Her taxable income (state pension plus some self-employed earnings) is usually between about £9k and £15k AFAIK. She plans to start deferring her state pension soon so this year her state pension income will be less than £1k, self-employed income will be less than £5k, and she will draw from this bond and hopefully start drawing from her Aviva pension. Her outgoings are usually quite low (no mortgage, frugal lifestyle).

HappyHarry

A gain of £30,000 over 7 years is an average of around £4,286 per year.

£4,286 added to her income does not look likely to push her into a higher rate tax bracket.

If it's an onshore bond, then she should have no further tax to pay on surrender (or partial surrender). Basic tax is paid within the bond.

If it's an offshore bond, then she will have to pay basic rate tax on any surrendered gain.

Aegon will be able to tell you if it is onshore or offshore.

As mentioned previously, though surrendering the bond may make her liable for tax, there may well be none to pay.

dunroving

HappyHarry wrote: »

A gain of £30,000 over 7 years is an average of around £4,286 per year.

£4,286 added to her income does not look likely to push her into a higher rate tax bracket.

If it's an onshore bond, then she should have no further tax to pay on surrender (or partial surrender). Basic tax is paid within the bond.

If it's an offshore bond, then she will have to pay basic rate tax on any surrendered gain.

Aegon will be able to tell you if it is onshore or offshore.

As mentioned previously, though surrendering the bond may make her liable for tax, there may well be none to pay.

Sorry for being dim but when you say higher rate tax bracket, I presume you mean the 40% bracket? If so, she definitely won't ever hit that level based on the withdrawals from her Aegon Bond and Aviva pension.

I suggested she call Aegon and ask if it is an onshore bond and they have told her that it is.

When you say basic tax is paid within the bond (seems I read this in at least one other response), does that mean that growth is net of 20% tax, that is paid by Aegon? I looked at the "bond history" section of her account and I notice that each year they have deducted about £250 for each of the two funds, which I assume is management charges (it says "establishment charge"), but other than that there are no other deductions.

Or are you referring to that payments into the bond were net of 20% tax? (I have no experience with these types of investments at all so don't even know how she paid in to the bond except the initial £62k was moved from a Skandia bond.)

The last thing you said - "she will have to pay basic rate tax on any surrendered gain" - what is a surrendered gain? If she withdraws £10k now, will some of this be a "surrendered gain"?

If I am reading correctly, drawing from the initial investment is free of basic rate tax, but growth is liable for basic rate tax (ignoring for the moment whether she is above the personal allowance)? Is this tied in with what Dunstonh said about "it may be more tax efficient to cash in policy segments as long as the gain after top slicing relief does not take her into higher rate"? If so, how do you cash in "policy segments"? The form they sent her to ask for a withdrawal doesn't seem to give an option for cashing segments ... at least the word "segment" isn't in there anywhere.

HappyHarry

I presume you mean the 40% bracket? If so, she definitely won't ever hit that level based on the withdrawals from her Aegon Bond and Aviva pension.

I did.

I suggested she call Aegon and ask if it is an onshore bond and they have told her that it is.

When you say basic tax is paid within the bond (seems I read this in at least one other response), does that mean that growth is net of 20% tax, that is paid by Aegon?

That means that any basic rate tax associated with the gain has been paid by Aegon.

each year they have deducted about £250 for each of the two funds, which I assume is management charges (it says "establishment charge")

They are management charges

To summarise, she could surrender the whole bond, or part of the bond, and given what you have said about her income, she would have no further tax to pay.

how do you cash in "policy segments"? The form they sent her to ask for a withdrawal doesn't seem to give an option for cashing segments ... at least the word "segment" isn't in there anywhere.

For a full surrender, there is no choice. Usually when making a partial surrender, the provider asks a question. The form may refer to individual policies instead of individual segments, but it means the same thing.

From what you have said, it is unlikely that she will ever need to pay higher rate tax on surrendering all or part of the bond, whichever method of partial surrender she choses. Unless, of course, the bond grows magnificently in value, or she starts earning a lot more money (or the higher rate tax goalposts are significantly moved).

It is worth re-stating that for a non-taxpayer, an onshore bond is not as tax efficient as ISAs, pensions, or unit trusts/OEICs, as any tax paid within the bond can not be reclaimed.

dunroving

HappyHarry wrote: »

I did.


That means that any basic rate tax associated with the gain has been paid by Aegon.

They are management charges

To summarise, she could surrender the whole bond, or part of the bond, and given what you have said about her income, she would have no further tax to pay.

For a full surrender, there is no choice. Usually when making a partial surrender, the provider asks a question. The form may refer to individual policies instead of individual segments, but it means the same thing.

From what you have said, it is unlikely that she will ever need to pay higher rate tax on surrendering all or part of the bond, whichever method of partial surrender she choses. Unless, of course, the bond grows magnificently in value, or she starts earning a lot more money (or the higher rate tax goalposts are significantly moved).

It is worth re-stating that for a non-taxpayer, an onshore bond is not as tax efficient as ISAs, pensions, or unit trusts/OEICs, as any tax paid within the bond can not be reclaimed.

I now have a copy of the withdrawal form/surrender form and it gives three options:

Withdrawal by cancellation of one or more complete policies (segments); or

Withdrawal by cancellation of units proportionally over all existing policies (segments); or

Cashing-in the entire bond

- I think she plans to make withdrawals over the next few years so will go with the second option.

I get the message re: not efficient for non-tax-payer(I think!) as I have seen this mentioned a couple of times before also.

The key thing initially was checking she would have no tax to pay if she withdrew £10k to pay for the car (I described the saga as to why she needs to do this in a couple of other threads).

The longer-term plan is as follows (somewhat contingent on the whole "new pension rules" thing shaking out):

Defer state pension for about 5 years so that after 5 years, she will then receive sufficient state pension to meet her basic living expenses ad infinitum.

During those 5 years, keep self-employed income + taxable pension withdrawals below the personal allowance.

Maximise tax-free withdrawals from the bond and tax-free withdrawals from the pension and use these to fund living expenses plus put remainder into ISAs.

In about 5 years, either (a) continue with the above plan until all the pension and bond capital is in ISAs, or (b) start taking state pension and gradually continue to trickle money from the bond and pension into ISAs until it is all in ISAs.

She is much more comfortable dealing with ISAs so the idea is eventually all her capital will be in tax-free vehicles (probably 100% in ISAs, though from this thread it seems that unless Aegon apply heavy withdrawal charges, there might be little reason to move from the bond, except maybe more flexibility in terms of investing in cash or low-risk funds).

Any holes in this plan, I'd be happy to hear about them, thanks for the help.

dunroving

Sorry, one more related question, if I may:

This investment bond was opened 7 years ago with Aegon. However, prior to that it seems the money was in a bond with Skandia. I am not sure why she was advised to move it to Aegon, but was wondering in terms of rolling over the years since inception, it's worth looking into the situation?

If she opened the bond with Skandia 20 years ago, for example, and the bond was transferred to Aegon 7 years ago, is it possible that she would be able to roll over 100% (20 years x 5%) as tax-free?

Aegis

dunroving wrote: »

Sorry, one more related question, if I may:

This investment bond was opened 7 years ago with Aegon. However, prior to that it seems the money was in a bond with Skandia. I am not sure why she was advised to move it to Aegon, but was wondering in terms of rolling over the years since inception, it's worth looking into the situation?

If she opened the bond with Skandia 20 years ago, for example, and the bond was transferred to Aegon 7 years ago, is it possible that she would be able to roll over 100% (20 years x 5%) as tax-free?

There's no rollover facility for offshore bonds.

dunroving

Aegis wrote: »

There's no rollover facility for offshore bonds.

What about onshore (it's an onshore bond)?