Insurance Bonds

bagofbones

I have a Prudence Bond which is jointly held with the missus. We have drawn 5% on and off over the years when required and taken lump sums from time to time. It has been a good investment and it keeps growing and despite withdrawals it is still worth about 50% more than it cost. Sounds great but.....

It is part of what I regard our low risk stuff. Alas as it has aged the Terminal or Final bonus element has become a lot more substantial. At the moment it is pushing 30% and if that evaporated in a market correction or crash I would be heartbroken.

So we are weighing up taking out a large chunk and since it will need to go direcly into an ISA to avoid tax on the interest this will be limited to the ISA limits. My understanding is that although this is a large ish sum, so long as I do not become a higher rate tax payer as a result of the withdrawal It will not be subject to further taxation. Additionally this policy is segmented and previously we have withdrawn by taking a portion of each segment.

This time we are thinking of cancelling some segments entirely so as to reduce the Final Bonus in absolute terms. Any insights would be welcome especially if someone thinks I've got something wrong. :beer:

kidmugsy

I look forward to someone explaining the mysteries of such arcane topics as "top slice relief", which should obviously be about cakes, but isn't.

dunstonh

It is part of what I regard our low risk stuff. Alas as it has aged the Terminal or Final bonus element has become a lot more substantial. At the moment it is pushing 30% and if that evaporated in a market correction or crash I would be heartbroken.

A correction on the markets is 10%. The asset mix of the Pru WP fund would mean a loss of around 3-5%.

A crash is 20%. The pru would be around 7%. in that scenario. We had a crash in 2015. What is different now that wasnt the case in 2015?

You have probably held this bond for at least 15 years as they stopped issuing it. So, you have gone through multiple crashes and a major depression. So, you should have a pretty good idea at the levels of volatility. So, why is this a concern now?

bagofbones

Sorry about the delay been a busy day.
Yes you are right we have had it a long time.
What has changed as I said in the original post is the %age size of the Final Bonus.

Whilst it is true that it is unlikely to go down in line with a market change of whatever magnitude, the Pru have the right to withdraw or reduce the terminal bonus in bad times (Read Brexit).

So whilst it may indeed go down a fair few points, if the Final Bonus was affected the change would be worse. I believe in 2003 they actually did this. I am rooting through the old statements to check.

I am thinking the return on a 5yr cash ISA would be safer if a bit smaller. And of course I am aging rapidly and running out of decades to let things recover in.


I have another (not with profits) bond which used to be Sun Life. I am thinking to do the same with that but the following tax year.

dunstonh

or reduce the terminal bonus in bad times (Read Brexit).

What has Brexit got to do with that?

I believe in 2003 they actually did this. I am rooting through the old statements to check.

They actually used MVRs mostly

I am thinking the return on a 5yr cash ISA would be safer if a bit smaller.

It would reduce investment risk but increase inflation risk/shortfall risk.

You also cant by the Pru product nowdays. They have a variation of it but its more expensive. These old Pru bonds are often worth keeping.

bagofbones

I've seen the variation of the With Profits which is on offer. I like the idea of a young new bond without the heavy Final Bonus. I don't like the idea of having to pay an IFA just so I can do what I want to do anyway.
in 2009 the final bonus was cut by 70% and an MVR was in place.
Brexit is not directly linked to this issue but is the issue on the horizon which could spook the market.

All that being said (he added patiently) I'm really interested in whether my original plan holds water - someone else mentioned top slicing but surely that is only relevant when becoming a higher rate taxpayer - something I intend to avoid. This business of withdrawals across segments or by cancelling whole segments is not entirely clear to me. I am fairly sure that the bond is tax paid unless the dreaded HRT becomes payable.


From the dearth of responses I suspect either these bonds are out of fashion or no one is much interested. Either way I shall desist.

Reed_Richards

dunstonh wrote: »

A correction on the markets is 10%.... A crash is 20%.

In December 1999 the FTSE 100 index came very close to 7000 and then declined to a low point of just above 3500 around the end of January 2003. That is almost 50% . I'm curious to know what the terminology for that is.

lindabea

Reed_Richards wrote: »

In December 1999 the FTSE 100 index came very close to 7000 and then declined to a low point of just above 3500 around the end of January 2003. That is almost 50% . I'm curious to know what the terminology for that is.

CRASHASTOPHIC perhaps

dunstonh

The terms correction and crash are not set in stone. In the US they have different terminology. Bear/Bull is used more for longer-term loss/growth periods.

The dot.com period was a 43% decline but it wasnt a crash as it took three years to fall. It was just an event after event that created a long decline.

Crashes tend to be short-term drops in the space of days or weeks.

Remember that the media refer to a 1% loss as a plummet. So, just you wait for the language they use during a proper plummet.