Pru with profit bond

allotmentboy1202

Advice please

We have a pru with profit bond which was taken out in Dec 2001.

Initial investment 41k current value 147k

I am currently pay @ 20% tax however only have 6k headroom, this year, before paying higher rate tax. My wife pays 20% total pensions etc approx 16k

I have today applied to take out the initial investment out of 41K and will put in an ISA as worried my headroom is shrinking each year.

I would like to draw remaining balance of approx 100k + over a number of years but keep within 20% tax limit.

Can someone point out the best way to so this and how to work out the tax on any gain please as not sure how top slicing is worked out.

I would also like to take out an additional sum from the bond this year but not sure that by taking out the initial investment of 41k I can still take out another 5-10k.

Any advise would be helpful

retiredbanker1

How do you intend to put £41k into an ISA when the annual limit is £20k?

dunstonh

I can't answer your question, even though I know the answers, because it's too specific and it would be a breach of regulation for me to do so.

However, don't let the tax tail wag the dog. A 2001-era Pru with profit fund is the old style, which was lower-cost than the modern version. If it were a unit-linked bond and you were moving it into an ISA, that would make perfect sense, but this is a niche investment fund that you cannot get any more, which is very attractive, especially for low-risk investors. Many people with these old Pru WP funds keep them as the cautious side of their portfolio. And use the Stocks and Shares ISA and GIA for their growth side?

infj

I thought you could take up to 5% p.a. of the total amount paid in of this Bond without paying any tax? Have I misunderstood?

artyboy

https://forums.moneysavingexpert.com/discussion/comment/82014590#Comment_82014590

Yes I know that assumes that she hasn't used her allowance, and there's £1k still to account for, but I couldn't resist…

poblomov

Top-slicing relief effectively means that, as long as the sliced gain (gain divided by the number of complete policy years) fits in your remaining basic-rate band, you won't be taxable on the gain at more than 20%. If it is an onshore bond, the liability will be covered by the notional tax credit.

Example 1 is the best illustration I could find from a quick search

https://techzone.aberdeenadviser.com/public/investment/top-slicing-relief

The only issue is, if your total income including the whole gain is over £100,000, your personal allowance starts to be withdrawn. The whole gain probably counts for High Income Child Benefit Charge purposes etc as well.

poseidon1

The Prudential bond should be segmented ( ie 100 segments) with each segment being in effect a mini policy in its own right.

You seem to indicate that you have never taken any of the 5% non taxable withdrawals at any time during your period of ownership.

However, in trying to take your original £41k you have to be very careful how you do so since there are two possibilities, being pro rata encashment across all segments or encashment of whole policies.

One option should mean no chargeable event certificate is issued by Prudential, but the other results in a chargeable event gain arising, and then you are wholly reliant on top slicing relief to avoid an income tax liability thereon.

Your best bet is to contact Prudential's technical team to talk through the best way for you to raise your intial £41k to avoid an inadvertent chargeable event arising.

My experience discussing this kind of issue with OP's holding Aviva's range of investment bonds is that their team are very good at providing helpful advice, I would hope Prudential would be similarly helpful.

Going forward, and with your diminishing future basic rate headroom , you have less options to personally access future bond proceeds tax free, the nearer your other income sources approaches the 40% threshold (but see comment in italics below).

With this in mind it is worth taking note of @dunstonh's suggestion that it could well be worth retaining the bond as a lower risk capital investment into retirement, especially if you believe your retirement income will be significantly lower than at present, perhaps giving much greater scope to avoid personal income tax charges on bond encashments at that point.

However also worth pointing out you can gift ( by assignment ) all or part of the bond to a spouse (or children if you have any), and their basic rate tax status could protect them from any chargeable event liabilties on encashment in their own names.

Finally worth noting @dunstonh's point that this type of investment bond cannot be purchased anymore and have attributes you cannot replicate with more modern investment bonds.