Prudential Investment Bond

davidr99

Hi,

I'm trying to help my mother-in-law out with her finances as her husband is in a care home and at the moment she is self-funding. She has a Prudential with-profits investment bond with added life insurance. It was taken out in 2001 with £63,000 and has 20 policies. It has grown over the years and is now worth about £140,000. A few things I'd like to know are:

• does this type of bond count towards any council financial assessment she may have in the future when her and her husbands saving are much lower or is it exempt?
• what is the efficient way to get money out of the bond? At the moment she takes a small income from it of about £1400 and I think this has varied over the years and may have been between £1000 and £3000. I read somewhere that she could take 3% of the original capital (£63,000) per year tax free and that this could be back dated. Not sure if this is true or if the income has to come off that figure. Or is it best just to leave the bond alone?

Any help on this would be gratefully appreciated.

Many thanks,

David

dunstonh

does this type of bond count towards any council financial assessment she may have in the future when her and her husbands saving are much lower or is it exempt?

It is not included in the means test. However, if an income or any money is drawn from it, then that is included.

what is the efficient way to get money out of the bond? At the moment she takes a small income from it of about £1400 and I think this has varied over the years and may have been between £1000 and £3000. I read somewhere that she could take 3% of the original capital (£63,000) per year tax free and that this could be back dated. Not sure if this is true or if the income has to come off that figure. Or is it best just to leave the bond alone?

There are two ways to draw from it (three if you include a combination of the two as an option). Which is best will depend on the financial circumstances. It's not 3% but 5%. And it's not tax-free but tax-deferred.

When local authority care means testing comes into play, then it's often best to push these down the pecking order, given the disregard that exists for the capital.

Obvously individual circumstances may force a solution but if there are other savings/investments available, then they would usally be moved ahead of these (including redirecting the income withdrawal)

davidr99

Thanks for your reply. Some things are now clearer. So tax deferred - I assume tax is then paid on surrender of bond or death of bond holder (my mother-in-law).

She has a variety of ISA's and fixed rate saver bonds which can fund the care home fees for a few years so best not to touch this bond in the short term. My mother-in-law keeps asking what is the best way to get money out of it in the future, she is not trying to dodge paying tax on it but isn't sure how it works. If she took a large lump sum out of it or surrendered the bond then I guess tax would then be due and she would need to fill in a tax return. Also in the event of her death then I assume it passes to her estate? Sorry for lots of questions it's not something I'm familiar with and want to give her the best advice.

Marcon

Can you lay hands on any of the paperwork she will have been sent at the time she took out the bond? If not, might be worth asking Pru for a copy, or at least a link to the relevant page on their website which should give you all the details you need to reassure your MIL.

DRS1

Would this page help at all?

UK Bond Tax Guide | Prudential

davidr99

Thanks for the replies. I'll have a look through the original paperwork and that link looks like it will be very useful.

Linton

https://forums.moneysavingexpert.com/discussion/comment/81924011#Comment_81924011

Investment bonds come under income tax rather than CGT and the taxation is somewhat complicated. Tax may be due on surrender but basic rate tax is assumed to have already been paid by the bond manager so it is only the potential 20% higher rate component that is of concern. Depending on your MiLs exact circumstances there may be no tax may be due at all.

LHW99

From the original post, it sounds as if F-i-L is in a care home, but the bond is in M-i-L's name.

If that is so, then no part of the bond would be relevant to F-i-L's care fees, as he should only be being assessed on his own savings & income.

davidr99

Again thanks for the replies. Beginning to understand things a lot better now.

As my father-in-law is in a care home and the bond is in my mother-in-law's name then when it comes to a financial assessment from the council for care home fees the bond won't count.

With regards to getting money out. If she takes a lump sum out of say £20,000 this creates a chargeable event and assuming that the bond has doubled in value then the gain would be £10,000. This would be added to her current income of about £15,000 to give £25,000 so keeping her below the higher rate tax band and thus no tax is due. Have I got this correct? Also if her gain took her into the higher rate tax band then some tax would be due? And as she has taken a regular income from this bond of about £1500 (although in the past it has been between £1500 and £3000) is this included in the gain when a chargeable event occurs or are allowances carried forward to accumulate?

Sorry for lots of questions but I realise the tax situation here is complicated so just wanted to make sure I understood everything. Am also wondering if it might be best to see a financial advisor.

Marcon

Sorry for lots of questions but I realise the tax situation here is complicated so just wanted to make sure I understood everything. Am also wondering if it might be best to see a financial advisor.

If all you need is clarification on the tax treatment of the bond/life cover, then a financial adviser probably isn't the best person - a competent accountant with a good understanding of tax matters might be a better idea. This isn't a hugely complicated matter, especially if you are able to give them the relevant paperwork.

Linton

https://forums.moneysavingexpert.com/discussion/comment/81925067#Comment_81925067

You are correct that a withdrawn gain of £10K with current income of £15K would result in zero tax.

If the gain took her into the higher rate tax band a bit of magic called "top slicing" comes into effect. The total gain is averaged over the time frame since the last chargeable event and added to the current income. If that total is less than the higher rate band the whole withdrawal is regarded as being within the basic rate band with no tax being due.

If the gain was £100K over 10 years, under the basic rules the over £100K income tax band would apply. However the top sliced amount is £10K which added to the current income of £15K gives £25K, well below the higher rate band. So no tax would be due.