Cashing in investments for retirement, tax implications?

Sea_Shell

A relative's got one of these, via an advisor.

I try and stay out of his affairs, but I do worry he (or his estate in future) may fall foul of how these bonds work.

He does have a FA (large national chain, not independent 😉), but I have no idea how thorough they are in "advising" on the tax side of things.

My worry is a huge tax bill is going to come out of the woodwork one day ☹️

How far back can HMRC go?  As most of the large withdrawals were almost 10 years ago.  

dunstonh

How far back can HMRC go?  As most of the large withdrawals were almost 10 years ago.  

With investment bonds, it is the whole policy term.  Different ways of drawing the money mean some methods are deferred until a chargeable event occurs.  

sienew

pip895 said:

Presumably your mother doesn't need the whole amount at once?  If so, might it be possible to draw down the bond in sections - could you enquire of Aviva about that?  Your mum would be less likely to end up with a tax bill that way.  I have rather sketchy memories of my Father doing something of the sort with a policy he had, although his situation was undoubtedly different from your Mums. 

She is wanting to gift some to relatives and take advantage of the (expected) interest rate increases with some fixed savings accounts. They possibly might pay less than other options but she is looking for simplicity (less confusing investments like this), security and ease of access.

Sea_Shell

dunstonh said:

How far back can HMRC go?  As most of the large withdrawals were almost 10 years ago.  

With investment bonds, it is the whole policy term.  Different ways of drawing the money mean some methods are deferred until a chargeable event occurs.  

So if no self assessments had been submitted and no top slicing ever claimed then there's a risk of a huge tax bill at some future point!!?

I have a horrible feeling that they have received numerous "chargeable event" certificates over the years and never acted on them.

Would anything have happened automatically, other than 20% standard tax being deducted?


(Sorry for gatecrashing)

Sea_Shell

Also with these bonds are the funds within them usually held as ACC or INC funds, like normal investments?  Or is it personal choice? Something different?

If held as INC would that be easier to tell what's pure growth when making decisions to sell etc.

Sea_Shell

sienew said:

pip895 said:

Presumably your mother doesn't need the whole amount at once?  If so, might it be possible to draw down the bond in sections - could you enquire of Aviva about that?  Your mum would be less likely to end up with a tax bill that way.  I have rather sketchy memories of my Father doing something of the sort with a policy he had, although his situation was undoubtedly different from your Mums. 

She is wanting to gift some to relatives and take advantage of the (expected) interest rate increases with some fixed savings accounts. They possibly might pay less than other options but she is looking for simplicity (less confusing investments like this), security and ease of access.

From what I understand, withdrawals are treated differently depending on HOW (and when) they're taken.

So could either be taxed as income or capital gains.   Some may even be tax free IIRC?

Not sure if you can get "double whammied" by both on the same money??

Malthusian

So if no self assessments had been submitted and no top slicing ever claimed then there's a risk of a huge tax bill at some future point!!?

You don't need to claim top slicing until it becomes relevant to the calculation, typically when the whole bond is encashed (or whole segments). Top slicing doesn't apply to partial withdrawals taken across the whole bond.

I have a horrible feeling that they have received numerous "chargeable event" certificates over the years and never acted on them.

If they owe tax then HMRC will catch up with them eventually. Insurers share information with HMRC. It is entirely possible that chargeable event certificates were issued but no tax was due at the time of the withdrawal, depending on the size of the withdrawal and their tax position.

If they are taking ongoing advice on the bond, their adviser will carry the can if they paid or will pay tax unnecessarily and the adviser could have done more to dissuade them or advised them on how to do it more tax-efficiently.

I wouldn't get involved. There is no information in your posts that indicates they have a problem. If they do want to check their tax position they should contact their adviser.

Also with these bonds are the funds within them usually held as ACC or INC funds, like normal investments?  Or is it personal choice? Something different?

If held as INC would that be easier to tell what's pure growth when making decisions to sell etc.

All income and gains are rolled up within the bond. Traditionally insurance bonds used insured life funds. Effectively they would be "accumulation units" - but "acc/inc" is a unit trust / OEIC thing and doesn't really apply here.

There is no "pure growth", just chargeable gain.

So could either be taxed as income or capital gains.   Some may even be tax free IIRC?

No, chargeable gains from insurance bonds are always taxed as income, not capital gains.

For onshore bonds, on some gains there may be no further tax to pay because it is already deemed paid within the bond.

The taxation of insurance bonds is complicated and full of traps.

sienew said: She is wanting to gift some to relatives and take advantage of the (expected) interest rate increases with some fixed savings accounts. They possibly might pay less than other options but she is looking for simplicity (less confusing investments like this), security and ease of access.

A medium risk investor would say that is a bad idea because she is cashing in investments during a low point in the markets in order to dump it in cash. (And then tie it up in fixed rate accounts, which in the absence of a specific spending goal in a few years' time means she will probably carry on holding it for the long term anyway.) But if she wants simplicity and less risk there's nothing wrong with accepting lower returns. And it sounds like she is still considerably in profit, even after the recent fall, due to how long the bonds have been held.

As she wants to give some of the money away, it is worth noting that you can assign bonds to others as a gift (including parts of a bond if it's been segmented, which most are), and they can then cash them in and pay tax on them in their own hands. It might be unnecessary complication depending on her own tax position. Especially if this is an onshore bond, her only income is State Pension, and she hasn't taken any withdrawals from it. The taxation of insurance bonds is complicated and full of traps.

Linton

I fear we may be going over the top for the OPs mum's stated situation. She is a non tax payer with only income being SP.  She has held the bond for 20 years with no withdrawals.  She is therefore entitled to take out the original investment with no extra tax to be paid under the cumulative 5% allowance.  

She has made a gain of £70K spread over 20 years.  If she withdraws all the money no extra tax is due thanks to top slicing. The only risk of tax I can see as a possibility is that if the bond is not segmented and she takes a large partial withdrawal > about £40K taking her into a higher tax band.   If the bond is segmented she can make total withdrawals of the appropriate number of segments.

Please could someone enlighten me if I am wrong.

sienew

Malthusian said:

A medium risk investor would say that is a bad idea because she is cashing in investments during a low point in the markets in order to dump it in cash. (And then tie it up in fixed rate accounts, which in the absence of a specific spending goal in a few years' time means she will probably carry on holding it for the long term anyway.) But if she wants simplicity and less risk there's nothing wrong with accepting lower returns. And it sounds like she is still considerably in profit, even after the recent fall, due to how long the bonds have been held.

Somehow the bond is at an all time high. Last months statement is the highest amount it's ever been.

Linton said:

I fear we may be going over the top for the OPs mum's stated situation. She is a non tax payer with only income being SP.  She has held the bond for 20 years with no withdrawals.  She is therefore entitled to take out the original investment with no extra tax to be paid under the cumulative 5% allowance.  

She has made a gain of £70K spread over 20 years.  If she withdraws all the money no extra tax is due thanks to top slicing. The only risk of tax I can see as a possibility is that if the bond is not segmented and she takes a large partial withdrawal > about £40K taking her into a higher tax band.   If the bond is segmented she can make total withdrawals of the appropriate number of segments.

Please could someone enlighten me if I am wrong.

That seems to be right. Just now a case of really trying to figure the self assessment stuff out, or finding an accountant/FA who can help with that.

Linton

sienew said:

Malthusian said:

A medium risk investor would say that is a bad idea because she is cashing in investments during a low point in the markets in order to dump it in cash. (And then tie it up in fixed rate accounts, which in the absence of a specific spending goal in a few years' time means she will probably carry on holding it for the long term anyway.) But if she wants simplicity and less risk there's nothing wrong with accepting lower returns. And it sounds like she is still considerably in profit, even after the recent fall, due to how long the bonds have been held.

Somehow the bond is at an all time high. Last months statement is the highest amount it's ever been.

Linton said:

I fear we may be going over the top for the OPs mum's stated situation. She is a non tax payer with only income being SP.  She has held the bond for 20 years with no withdrawals.  She is therefore entitled to take out the original investment with no extra tax to be paid under the cumulative 5% allowance.  

She has made a gain of £70K spread over 20 years.  If she withdraws all the money no extra tax is due thanks to top slicing. The only risk of tax I can see as a possibility is that if the bond is not segmented and she takes a large partial withdrawal > about £40K taking her into a higher tax band.   If the bond is segmented she can make total withdrawals of the appropriate number of segments.

Please could someone enlighten me if I am wrong.

That seems to be right. Just now a case of really trying to figure the self assessment stuff out, or finding an accountant/FA who can help with that.

That is what is meant to happen with "with profits" funds.  The fund retains money in the good times to support the price when conditions are less favourable.  Sounds good, but the downside is that this leads to over-cautious investng and higher costs.  They were popular and some of the old ones were pretty good but they are out of fashion now.