Insurance bonds and 5% withsrwal facility

oldwiring

If Market Value Adjustment is being applied by an insurer, do 5% withdrawals suffer the penalty?

the-chauffeur_2

It depends on two things - your insurer's policy on MVAs and what you are taking 5% of.

From a taxation point of view, the trick with the 5% withdrawal facility is to elect to take up to 5% of the original investment amount. Basically, open-ended investments like with profit bonds are viewed by the inland revenue as having a notional term of 20 years (more for simplicity of accounting than anything else). So you are allowed to take 5% of your original investment amount each year - and if you keep doing that for 20 years, you've withdrawn all of the original investment. The rest may then be taxable on withdrawal after year 20, but that'll depend on your tax bracket at that time. Therefore, the revenue says you can withdraw up to 5% of the original investment per annum tax free - and I'm pretty sure you can roll that amount up over time (i.e. 4 years with no withdrawals means you can take 20% original investment in one go) - but don't quote me; it's been a while since I was last asked.

Taking 5% of the current value of the bond is a different - and more complicated - matter, particularly if the investment is now worth considerably more than the amount you put in. There are also two different ways of making withdrawals - which is why most bonds are segmented into 20 or so separate policies. You can either withdraw a bit from each, or cash in the individual segments. You'll need to discuss the most appropriate arrangement with your financial advisor because the "best" way very much depends on individual circumstances. At the same time, it could be that the insurer will apply the MVA if 5% of the current value means you're taking out more than 5% of the original investment.

Most insurers (he says) won't apply MVAs to 5% original investment withdrawals - and it's one of the most efficient ways to get money out of a bond without incurring penalties. If you don't need to withdraw all of the investment at once, taking it out using the 5% facility over time he system also has two other (potential) advantages - one being that hopefully the investment funds will recover to such an extent that your insurer will change or completely withdraw its application of MVAs (hey, you never know - it's a medium-to-long-term investment after all).

The other is that many people with these types of investment will reach retirement at some point in the not-too-distant future. At the point they retire, their income will drop - and in many cases, so will their income tax banding (from 40% to the lower rate). Since there's no tax payable on investments like with profit bond gains by lower rate taxpayers (it's already deemed to have been paid before fund 'profits' are distributed), they should be able to take all the gain free of further tax.

But clearly this isn't a simple area and it all needs proper consideration and advice. Bottom line, ask your insurer to explain its MVA policy (and the 5% facility) to you. If necessary, speak to a technical helpline - some have them. If you need more information after that, it gets personal (individual tax rates, state benefits, other incomes and so on), so you're best off seeking independent financial advice.

Not the straightforward answer I would imagine you were looking for, but I hope some of that helps

dunstonh

oldwiring wrote: »

If Market Value Adjustment is being applied by an insurer, do 5% withdrawals suffer the penalty?

Virtually no providers will levy an MVR on their automatic withdrawal amount. With some providers this can allow upto 10% a year.

If an MVR is being levied, then you are in pretty naff version of a bond so growth and taxation isnt really going to be an issue for you.

oldwiring

Thanks both.