Advice please regarding investment bond 5% rule - after a capital reduction.

Jaaaaag

I invested £300,000 in a bond many years ago. I have taken the full 5% per annum cumulatively, but in the early years I withdrew half the capital to help build a house. Is the 5% now calculated on the original £300k or the residual £150k? My IFA says the latter but everything I read on line suggests the former but I cannot find an exact FAQ for this scenario.

HappyHarry

The answer will depend on whether you surrendered half of the number of  segments or if you withdrew half of each segment.

Jaaaaag

HappyHarry said:

The answer will depend on whether you surrendered half of the number of  segments or if you withdrew half of each segment.

Thanks - which route would have preserved the advantageous 5% of 300k please?

HappyHarry

When an investment bond is created, it is split into a number of identical segments. In this case, let us assume you bought 100 segments of £3,000 each.

When you sold £150,000 you either:
(i) Sold 50 segments of £3,000, leaving you with 50 segments from which you can still draw your 5% per year initial capital. This initial capital would now, of course, be £150,000 as you have sold half of the original segments.
(ii) Sold £1,500 of each segment. This would leave you with all 100 segments, from which you may still be able to draw your 5% per year initial capital.

(i) above is more likely to have happened, as this would have likely minimized tax at the time you took the £150,000. However you would now only have half your original segments left.
 
(ii) above would have preserved the potential future 5% withdrawals from all the original segments, but at the cost of a potentially significant income tax liability when the £150,000 was taken.