Insurance investment bond 5% tax rule

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mookev
mookev Posts: 58 Forumite
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in Savings & investments
We have a friends life (now owned by Aviva) investment bond in which I invested £16k in 2013. Does the 5% per year rule which avoids tax, apply to the original capital investment or to the capital plus investment gain please. 😊

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  • want_to_save
    want_to_save Posts: 403 Forumite
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    you can draw 5% per annum of the original investment tax deferred for 20 years (that would assume that after 20 years you will have drawn the £16k) it is based on policy years so rough rule of thumb you could draw £4,000 today (5 full policy years) and not pay any tax
  • Malthusian
    Malthusian Posts: 10,941 Forumite
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    want_to_save wrote: »
    you can draw 5% per annum of the original investment tax deferred for 20 years (that would assume that after 20 years you will have drawn the £16k) it is based on policy years so rough rule of thumb you could draw £4,000 today (5 full policy years) and not pay any tax

    Assuming no previous withdrawals, natch.

    And while withdrawals over 5% in the policy year create chargeable gains, you only have to pay tax on those gains if they fall into the higher rate tax band. *If* this is an onshore bond.

    Insurance bonds were already a slightly strange choice in 2013. Why not a stocks and shares ISA?
  • mookev
    mookev Posts: 58 Forumite
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    Already had the bond for 20 years and added to it when I retired. ��
  • SonOf
    SonOf Posts: 2,631 Forumite
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    mookev wrote: »
    Already had the bond for 20 years and added to it when I retired. ��

    Was that via advice or DIY? The investment bond was a very niche option by 2013. It accounts for around 1% of wrapper use overall.

    Some legacy ones can be worth holding on to (often for tax reasons that need to delay or stagger exit) or that they have good terms that make the extra tax a non-issue.
  • Malthusian
    Malthusian Posts: 10,941 Forumite
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    mookev wrote: »
    Already had the bond for 20 years and added to it when I retired.

    Then you've already had your 100% tax-deferral allowances for the original premium, but when you made an additional investment (presumably that was the investment in 2013 you mentioned in your original post?), you would have started accumulating 5% allowances for that as well, i.e. £800 a year until 2033.

    This is assuming the additional investment was a top-up to the existing bond rather than a new one with a different policy number.

    As SonOf alludes to, holding insurance bonds often means paying voluntary tax (unless you have very specific circumstances and plans). If the total investment is reasonably substantial then talking to an IFA could save you money.
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