With Profits Bond withdrawals

Tazzh

Hello. My husband and I have had a with-profits bond since April 11th 1991. It was Norwich Union which became Aviva. The original investment was 20 policies of £1300 each. Total £26’000. 

It’s now worth, including bonuses, £148’000. 

In Sept 1998 £5’000 was withdrawn across 18 policies.

I’m now looking to make yearly withdrawals from the bond but don’t fully understand the tax and chargeable event implications and I’d like to avoid both if at all possible or at least significantly mitigate them. 

So ideally I’d like to withdraw an amount every year that ticks both of those boxes.

The policy states  “normally the benefits from the Plan will be exempt from Capital Gains Tax.”

I’m a homemaker with no taxable income and he’s on a basic state pension. 

Could anyone tell me how much I could take from the bond yearly, without being liable to tax or chargeable events please and what is the highest value I could take as a lump sum?

I’ve read the 5% rule over and over and I’m now confusing myself tbh.

Any help in how the calculations work would be appreciated. Thank you

Linton

Assuming this is a standard on-shore bond, which it sounds like it is, you can take 5% of the original sum invested each year tax free for 20 years.  It is tax free because it is assumed that you are withdrawing from the original capital.

When you come to take the gains life gets (much) more complicated.  The gains come under income tax in the year you take them rather than CGT and  they could be charged at 0%, 20%, 40%, or 45% tax depending on the value and the owner's tax position. 

You can take the full lump sum at any time but should have worked out the tax consequences before doing so.  Note that there could be a reduction if you dont hold the bond to the full term.

Tazzh

Linton said:

Assuming this is a standard on-shore bond, which it sounds like it is, you can take 5% of the original sum invested each year tax free for 20 years.  It is tax free because it is assumed that you are withdrawing from the original capital.

When you come to take the gains life gets (much) more complicated.  The gains come under income tax in the year you take them rather than CGT and  they could be charged at 0%, 20%, 40%, or 45% tax depending on the value and the owner's tax position. 

You can take the full lump sum at any time but should have worked out the tax consequences before doing so.  Note that there could be a reduction if you dont hold the bond to the full term.

Thank you.
There doesn’t appear to be a full term date on any of the paperwork. 

As I’ve withdrawn £5’000 from the original capital is it now taken I only have 21k in original capital left or is that 21k rolling over 5% for the 20yrs from the year after I withdrew the £5’000?

And if I needed, which I think I most definitely do, financial assistance, would an accountant or an IFA be the better choice? 

Thank you again for your reply; this is well beyond my pay grade and the bond has done far better than I ever could have imagined tbh. It’s a little scary and I don’t want to be on the wrong side of the tax man:( 

Linton

Tazzh said:

Linton said:

Assuming this is a standard on-shore bond, which it sounds like it is, you can take 5% of the original sum invested each year tax free for 20 years.  It is tax free because it is assumed that you are withdrawing from the original capital.

When you come to take the gains life gets (much) more complicated.  The gains come under income tax in the year you take them rather than CGT and  they could be charged at 0%, 20%, 40%, or 45% tax depending on the value and the owner's tax position. 

You can take the full lump sum at any time but should have worked out the tax consequences before doing so.  Note that there could be a reduction if you dont hold the bond to the full term.

Thank you.
There doesn’t appear to be a full term date on any of the paperwork. 

As I’ve withdrawn £5’000 from the original capital is it now taken I only have 21k in original capital left or is that 21k rolling over 5% for the 20yrs from the year after I withdrew the £5’000?

And if I needed, which I think I most definitely do, financial assistance, would an accountant or an IFA be the better choice? 

Thank you again for your reply; this is well beyond my pay grade and the bond has done far better than I ever could have imagined tbh. It’s a little scary and I don’t want to be on the wrong side of the tax man:( 

You started with £26K original capital.  I assume that the £5K came from the original capital in the various policies rather than gains.  So as you say you have £21K of original capital left.  Since it is more than 20 years  since you bought the investment bond I believe you could take all of that tax free whenever you want.

The problem comes with the £122K (£148K-£26K) gains - £61K each.  If you were to take out the full pot, with simple accounting that would put both of you into the higher rate tax bands, which is something you would obviously want to avoid and is clearly unfair.

This is where the fun starts.  The investment bond drawdown with simple accounting changes both your tax bands.  Under those circumstances "top slicing"comes into effect.  Spread over the 33 year life of the bond you calculate how much on average you have gained each year: :£61K/33=approx £2K/year.  You then then repeat your tax calculations assuming this annual income.  

So in your case as a non-earner, £2K extra income is taxed at 0%.  In your husband's case there may or may not be basic rate tax due depending on the SP income.  But possibly 0% tax as well.  HMRC will do all the calculations so you dont need to do anything yourself, but you should know what is going on and why.

Note that this is assuming the worst case when you take all the money in one go.  You could take a small lump sum each year which should also be liable to 0% tax. Whether this is an efficient use of your money I dont know.

This is at the limit of my knowledge and could be wrong in detail.

Given in this example you would then have £148K to do something with you could consider whether is is worth your while paying for the help of an IFA both to advise on how best to access the money and also how you could use it to optimise your long term income.  An accountant would not be appropriate as they cannot give regulated advice and I believe are more familiar with business rather than personal taxation

Tazzh

Linton said:

Tazzh said:

Linton said:

Assuming this is a standard on-shore bond, which it sounds like it is, you can take 5% of the original sum invested each year tax free for 20 years.  It is tax free because it is assumed that you are withdrawing from the original capital.

When you come to take the gains life gets (much) more complicated.  The gains come under income tax in the year you take them rather than CGT and  they could be charged at 0%, 20%, 40%, or 45% tax depending on the value and the owner's tax position. 

You can take the full lump sum at any time but should have worked out the tax consequences before doing so.  Note that there could be a reduction if you dont hold the bond to the full term.

Thank you.
There doesn’t appear to be a full term date on any of the paperwork. 

As I’ve withdrawn £5’000 from the original capital is it now taken I only have 21k in original capital left or is that 21k rolling over 5% for the 20yrs from the year after I withdrew the £5’000?

And if I needed, which I think I most definitely do, financial assistance, would an accountant or an IFA be the better choice? 

Thank you again for your reply; this is well beyond my pay grade and the bond has done far better than I ever could have imagined tbh. It’s a little scary and I don’t want to be on the wrong side of the tax man:( 

You started with £26K original capital.  I assume that the £5K came from the original capital in the various policies rather than gains.  So as you say you have £21K of original capital left.  Since it is more than 20 years  since you bought the investment bond I believe you could take all of that tax free whenever you want.

The problem comes with the £122K (£148K-£26K) gains - £61K each.  If you were to take out the full pot, with simple accounting that would put both of you into the higher rate tax bands, which is something you would obviously want to avoid and is clearly unfair.

This is where the fun starts.  The investment bond drawdown with simple accounting changes both your tax bands.  Under those circumstances "top slicing"comes into effect.  Spread over the 33 year life of the bond you calculate how much on average you have gained each year: :£61K/33=approx £2K/year.  You then then repeat your tax calculations assuming this annual income.  

So in your case as a non-earner, £2K extra income is taxed at 0%.  In your husband's case there may or may not be basic rate tax due depending on the SP income.  But possibly 0% tax as well.  HMRC will do all the calculations so you dont need to do anything yourself, but you should know what is going on and why.

Note that this is assuming the worst case when you take all the money in one go.  You could take a small lump sum each year which should also be liable to 0% tax. Whether this is an efficient use of your money I dont know.

This is at the limit of my knowledge and could be wrong in detail.

Given in this example you would then have £148K to do something with you could consider whether is is worth your while paying for the help of an IFA both to advise on how best to access the money and also how you could use it to optimise your long term income.  An accountant would not be appropriate as they cannot give regulated advice and I believe are more familiar with business rather than personal taxation

Thank you so much for taking the time to explain that in a way that made it very easy for me to understand; much appreciated. 
I’m going to make an appointment with an IFA. Now I have a basic understanding of the figures I feel a lot more confident in taking this forward. Thank you again and best wishes